I just discovered my parents see a financial planner who charges them 1% of their TOTAL retirement fund per year. Is this normal, or are they being taken advantage of?
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It is very normal for full service financial advice. Depending on how involved your parents want to be in their finances, how much emotional handholding they need, and what other advice outside of investments the advisor is providing, then 1% could be considered reasonable. Some firms charge upwards of 1.5%.
Keep in mind that for that 1% the advisor should be actively cutting out middle men elsewhere. They shouldn’t be owning mutual funds inside a fee based account as they add another layer of cost not factored into the 1%.
If they don’t need full service financial advising (not everyone does, and I do this for a living), then they should look at Vanguard at .35%, Schwab, or Betterment.
Edit: Grammar
full service financial advice
This. I work for an RIA and honestly, investment management is no longer the main focus: we help with estate planning (in conjunction with an estate attorney), tax planning (in conjugation with a CPA), charitable giving, budgeting/cash flow (yes, a lot of clients still need this!), insurance (in conjunction with an agent), and overall retirement planning, along with basically any other financial items that may come up for a client.
It is most definitely not for everyone, but is worth it for a lot of people who would not be willing to handle dealing with all of that on their own!
This is us. We were never super interested in micro-managing our money and were doing pretty much OK, but as we got older it became obvious that we needed to be doing better. We started using "our finance guy" in our early/mid fifties and since then we've received a significant inheritance, my husband retired, I started a full-time job with much better benefits, and we have a teen-age son who will be going to college soon. He helped us get our wills taken care of, worked on estate and tax planning with us (with a CPA, which was a big change from my husband using TurboTax), advised me on retirement planning with my new job, and is helping us make sure that our son won't end up with ruinous student loan debt. It's definitely worth the fee he charges.
Yup. I inherited some money when my dad died and for a while had hired a big firm. Which used fee-based index funds and we would up with a huge, like five figures, tax bill.
Now I pay our fiduciary 1% along with some fees associated with an annuity (NOT for everyone but this particular one is designed to keep us from paying taxes out the ying yang in retirement.) We pay a lot less in taxes, which makes the fiduciary worth it to us, too. (Not that I think there's a free lunch or taxes are bad in general, but why pay more than your share?)
How does an annuity keep you from paying taxes out the ying yang in retirement?
Probably by paying you a set amount that's low enough that you end up not owing much if any taxes after the standard deduction.
Yes!
“My future life depends on this and screwing up could literally make me homeless and most people do this wrong, so I will just do this all myself instead of soliciting any professional advice or assistance” - reddit
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former RIA
I would say until you dont feel comfortable or have better things to do. As a poor analogy, sure you could always buy a lawnmower and mow your lawn, but maybe one day you wake up and realize you now have a really huge lawn or you realize you would rather go see a ballgame or heck, you wake up and realize you still really love mowing lawns.
As an aside, as your net worth increases, you dont need to make things more complicated, but more options become available.
The lawn mower analogy is perfect! I now have a larger yard and I have less free time. Because my time with my kids is more valuable to me I hired a lawn service. When my financial situation gets too big for me or my time I’ll get a FA.
nothing wrong with that! Not everyone packs a lunch every day, cuts their own hair, rotates their own tires, sews their own buttons back on, etc.!
This is a great idea. My parents made me do it, although I didn't want to, I soon appreciated both the miniscule amount of money earned but also the hard work which made me feel like a man. Sweating in the summer as a 12 year old thinking you're Thor reincarnate.
The value of money becomes pretty clear, agreed. Yet I blew it all on alcohol, munchies, travelling and drugs until now, tbh.
I'm 20 and I've earned a total of 40k from the age of 16. The value of money is clear as day, today, and the lessons I've learned are my saviours.
That said, if you have a unique financial situation (I.e. business owner, inheritance). You might benefit from seeing a planner and working on an a-la-carte plan to set you on the right path. People usually like this better than paying 1%/yr when the value of the relationship is the initial plan.
At what point in my life do I need to switch over to a FA rather than diy? Is there a certain asset $ goal or as I get closer to retirement?
Your money is far better spent on a great CPA. Financial advisors are salesmen at heart. Some are not even fiduciaries, and far more people end up losing their money due to poor financial advice, than end up broke because they dumped their money into low cost index funds.
A great CPA can help you manage your finances and and tax plan.
I work in the industry, see how much money is paid in fees, and while it enriches me personally, see it is a huge waste for 95% of the population. I often ask around finance professionals I work with (many who are in the top 1%), and they primarily invest their own money in Vanguard and other low cost index funds.
The AUM fee is meant to reduce the need for salesman-like bullshit, and I’m not going to become a salesman once I get my license. Small independent advisers make plenty of money and needn’t squeeze their clients for it.
Besides, if I grow someone’s wealth then my cut gets bigger. It’s kinda like stock compensation.
The 1% flat fee also allows the client access, without having to worry that a phone call will cost (for example) $350 an hour. That’s a very real barrier to asking questions. (It’s also a PITA to bill that way)
What do they use when investing in vanguard? The target date has super low fees, but the other ones have much higher fees.
Or do they use the FP part of vanguard? Or just pick a few and go with that? I'm all in on the target date atm. I'm down like 14% for the year I think last I checked. But I'm a long way off so idc. I just keep putting in the max amount because I can't really make up for it later in life.
bogleheads
This eye cancer website?
Not that that that matters if it has good information, but I want to be sure before my eyes bleed.
Honestly if you are having someone manage your account they should be invested directly into the 4 funds that make up the target date funds (Total Stock, Total International Stock, Total Bond, and Total International Bond). The expense ratio is lower if you buy them all separately and manually adjust them.
Not a single one of your points is anything other than opinion though. I don't use Vanguard, I am a CFP and don't think I'm better than a full service RIA financial advisor for the majority of clients.
Anyone with less than a quarter million is wasting money on a CPA or CFP. Many, if not most full service RIA's come with tax planning included in their fees.
That’s BS most financial advisors are not sitting there with the majority of their personal assets in low cost index funds.
Like most diversified portfolios many of them will hold index funds, but as a small portion of the account.
It largely depends on what you want to do with your money, and how much you have to invest.
If you are planning on doing options trading, hedging, and bond speculation, you will probably need some assistance from a FA or full-service brokerage.
If you have inherited IRAs, or accounts that have special rules associated with them, and required special RMDs, you might want some help with that.
If you are simply purchasing mutual funds, ETFs, closed-end funds, securities, and bonds, you don't need anyone to help you with that, and it makes zero sense to use a full-service brokerage or FA/FP.
I use Schwab Personal Advisor, which charges .38 of assets, because I ultimately want to build a laddered bond portfolio, and I have an inherited IRA, along with some other more complex arrangements. If you simply want to buy a bond fund, or a few individual bonds, again ...a standard, discount brokerage account is fine.
Some people will say, "but advisors help you with annuities and other insurance products!" --to which I say, you don't want anything to do with those "products", especially if you have a lot of money. Simply get yourself term life and call it a day.
Estate planning, trusts, etc., should be handled by your lawyer, not your financial advisor/planner. Taxes should be handled by your accountant.
Come back when you want to set up and manage a CRUT on your own.
Similarly, do you know your assets are titled correctly to avoid probate?
Well, more like hey here is an entire industry ready to change oil and there are people who know how to change their own oil and people who dont know how. The most stupid people? The people who are too busy or cheap or whatever and refuse to pay someone so the car oil never gets changed. The financial industry doesnt need everyone to be a customer, but there are plenty of people who might benefit tremendously. some people own cars that make it easy to do it yourself, others drive cars that make it difficult. Etc.
Most of my clients that I’ve acquired over the years were the type who couldn’t do it themselves. I’ve had a few who didn’t need my services but merely a direction to be pointed in to start. A 1% fee isn’t going to matter much to most people. If you’re concerned about the fee and just want some ideas, then just pay a one time fee and I’ll give you the best I got
But they’re not gonna like that fee you ask for one time. “I can just google this myself why would I pay for YOUR opinion”
I meant anyone questioning your AUM % fee and why you deserve that. Many people wrongly don’t feel they should pay for financial advice and they know better themselves.
When they question it I usually say you have complete access to myself and your money. Its personal service and I have to make money too. Try calling an 800# and getting the same person twice. If they’re unhappy I’ll gladly refund a portion of my fee if I acted against their wishes
So at-home brain surgery is only a bad idea because it's dirty and requires specialized tools? Okay...
Which is an entirely different thought than
so I will just do this all myself instead of soliciting any professional advice or assistance
but sure we can pretend like you never said it and the other guy didn't call you out. We can pretend like you didn't imply bias. We can pretend like your analogy works.
Or we can just live in reality. Your call.
How much money do you think you need to start pursuing this as an option? I make a modest income but am self-employed and am beginning to really worry about my lack of knowledge in all these areas.
Where does one start with trying to pursue this kind of full-service? Can you start with a "little" bit of full service, lol?
Do you belong to a trade group / group of people who are also self-employed? These other self-employed people are a great source of information (and networking).
Perhaps start with an accountant and go from there with his/her recommendations on next steps. Do you have employees? Have you researched what retirement account would be best - from an individual IRA, SEP IRA, Solo 401k, etc? I'd start with an accountant to make sure you are making the most of your self-employed situation and then figure out next steps. Perhaps a fee based planner to help work out your financial goals and a plan that you can execute yourself as your business grows.
Uh, yeah. That doesn't come off as bitter, sarcastic or biased in any way. How can I give you all my money immediately?!
To be fair, I've seen a fair number of posts that have replies saying "you really should use an FA/CPA/Professional of some sort since you've got a decent amount of money there" so idk. Of course there's gonna be those people who want to learn to diy it, and reading some of these threads I feel like I know where to start when I need to start.
I’m an EA so I like to look at stuff and sorta quiz myself. I do it because I’d like to advance myself a bit if people have interesting questions. There are lots of times, though, where I’m like “this is too much work, I’m not getting paid for this when I could be charging a client for the same advice.” That’s where I tend to just say to people “you need to talk to a professional.”
Well, by your own definition there should be a pretty huge market.
And as an aside, plenty of people retire comfortably, but if the discipline and know how are pretty easy, so many people of apparent means still looking at financially miserable futures.
As a 30something in good health with a solid 401k and roth (Vanguard), employee provided insurances, short form taxes, no property, etc... this absolutely seems like a waste for me.
My parents, on the other hand... retired with pensions, 401k, multiple houses (inherited rentals), and pushing 70? Sounds like an awesome service.
A 1% fee for all of that... when you have a lot to manage and a lot to plan for? Heck yes. Not to mention, they're making more than 1% returns... so they're not losing capital.
Yep. Sometimes I will tell clients “would you pay 1% in fees for advice and guidance on how to protect the other 99%?” Usually it’s a no brainer when put in that context, but not all folks use 1% of advice always which is why most firms have multiple account options. I manage a portfolio of stocks of $1m and he pays no fees, but also doesn’t really need advice or cares about it. It’s not a one size fits all approach like it’s sometimes framed.
Many people don't need that advice every year, so shouldn't keep an advisor indefinitely.
I might spend 1% of the value of my house on locks and an alarm system, maybe even more, for the set-up costs. I'm not going to spend 1% of the value of my home every year for insurance and a security contract though. And in that analogy, if something goes terribly wrong the companies I've paid will actually help recover my losses.
Also, the "account options" you speak of are generally: be rich and we'll skim less. The fee only goes down with more money invested.
This comment sooooo doesnt get it I can’t help but laugh. You’ve clearly figured this finance thing out. Have fun with all your money.
I took my money out of an actively managed account a little over a year and a half ago. In the first year, after subtracting the fee, I was up by 0.3% (7% vice 6.7%) as compared to the funds I held through the advisor. I've followed the most basic advice available on the internet, nothing fancy.
I don't regret having an advisor, especially since I didn't need $3,000 minimum per fund to get started and he helped me get on my way. In the end though I paid him/his company around $3,000 for his advice over 5 years.
If I waited until I had over half a million with the advisor, the fee would have gone down enough that maybe I'd be beating the market, but that's still 7 years down the road for me (and would have been another $10,000 in fees paid). Even then, if I pulled some of my money out to buy a house I'd be back under the line for another few years.
The advisor couldn't insure my accounts, he couldn't guarantee my returns, and his advice largely lined up with what can be found online. For someone who doesn't have time to calculate contributions every paycheck to keep the portfolio balanced, or who might be panicky watching the market drop, or people who just aren't good with money, retaining an advisor might be worth the fee. I don't think the majority of people in this subreddit are in that boat so, for us, the 1% fee is not protecting the 99% in any way we can't do ourselves.
I do have friends who trade individual stocks, some see it as a hobby and will freely admit they are under-performing the market, some claim they could match their salary with only a few minutes a day but quickly back-track when pressed for results. That's not what I do and it isn't what my advisor did either.
You can pay for the undercoating on your new car if you'd like, but it's not for me.
Tell that to the 76 year old widow who has no idea what a stock or bond even is. Let her do it all by herself because it’s free and god forbid we pay for services. Great idea chief.
Unfortunately that is the rule. The people who need the most help are those entering or living in retirement. The 30 year doesn’t necessarily, outside of basic saving and investing habits.
Please find a client who has only lost money, or at best, not gained any money over a 30 year period with a financial advisor. Only then would the losses be tough to justify. Also it wouldn't be 30% of your overall portfolio, but 1% of a yearly snapshot of your portfolio, 30 times over. (1% of a portfolio worth 100 dollars at year two is a drastically different pay out then 1% of a million dollar account at year 29) So either way you look at it, no one's walking away with a flat 30% of your money, no one would pay for that.
I think what /u/CH450 is saying it is that if you, for example, start with $100,000, over 30 years at 8% annual growth that's just about $1,000,000. But if a financial advisor is taking 1% a year, so only 7% annual growth, that's only $760,000 after 30 years. So they have taken about 30% of your money.
/u/CH450 is right, it does add up. IMO better to pay a one time (or a couple if you need) flat fee to get some knowledge and a low maintenance plan, instead of forking over 1% a year for 30 years.
Unless you have the magic formula that earns at least 1% more than a basic balanced fund portfolio, they are losing money.
In the same way that using a coupon for potato chips is not saving money if you wouldn't have bought chips otherwise. You'd think a financial advisor would be aware of this.
A 1% fee for all of that... when you have a lot to manage and a lot to plan for? Heck yes. Not to mention, they're making more than 1% returns... so they're not losing capital.
Sure, if there is a high water mark and the advisor only gets paid when they go past that point. If they get paid 1% even if they lose more than the market would otherwise, THEN it's an issue.
How is it an issue? Vanguard takes their cut regardless of performance... and they're not even providing anything other than a simple way for me to invest.
Also, the returns on an account like theirs are pretty non-volatile as they're more heavily weighted towards bonds... a 4% return is huge and a 1% return is horrific.
1% is 1%. Actually... 1% is less on a bad year. You're paying for more than investing- they manage taxes, estate planning, insurance, and other services that the average person would have to dedicate a lot of time trying to optimize.
Since I was using my parents as an example- They will never see 10% returns on their retirement funds. They will never see 5% loss on their retirement funds. You don't tie a large portion of your retirement fund to the stock market when you are actively drawing retirement... you tie it to bonds, equities, CoDs, etc. You want to fend off inflation without risking losing your 'salary.'
If you look at Vanguard Target 2020, it is consistently 1.5 to 2.5% return. My target 2050 is volatile. But if the market tanks and I lose 30%, I don't feel it. My parent would actually take a huge hit, because they are withdrawing that money. That's why the target funds shift as you get older.
Until their kids start looking into things and see the 1% fee is a few thousand annually, ignoring the 99% they have and talk their parents into doing online trades for only 5$ and before you know it they’ve squandered half their wealth. Let us do our job Bradley. You and your friends who just graduated and got jobs with price Waterhouse don’t know what you’re doing
At what age or income level do you think most people should meet with an advisor if they are not willing to do those things on their own?
There are plenty of fee-only (not “fee based” - there is a difference!) advisors out there who will do a comprehensive review for a one-time fee, maybe $1K, and not have it be an ongoing relationship.
Just depends on what you’re looking for and what you’re trying to accomplish - no set age or income level.
Problem is as life changes, so does your financial plan. Inheritance? New job with higher income? Moving? Estate planning? It’s never a bad thing to have “a guy” who knows you and your finances in and out and has been with you along the way. Good advisors don’t even have to talk about investments, they get to know their clients on a deeply personal level. It’s one of those things you don’t think you need until you need it.
I don't have enough relatives for an inheritance every year, and if I did I think I'd get the hang of it by mysterious rich uncle death #5. Why pay constantly for a service I need only occasionally?
Then don’t pay for it. We don’t give a shit. You know how to do it yourself so clearly you don’t need professional advice since you know it all.
Which is why there’s a multi trillion dollar industry for financial professionals. Because know-it-alls like you are comfortable managing a million dollars in your own fidelity account. If only all of us licensed and certified professional degree holders knew as much as you do after a few hours of reading!
Which is why there’s a multi trillion dollar industry for financial professionals.
Most of whom are not providing advice for retail investors.
If only all of us licensed and certified professional degree holders
You are salespeople with a couple of months of training. Save your spiel for people who don't already know how the game works.
I highly doubt he does considering he believes he can invest his own money sans emotion in his little “low cost index funds” that are down 10%+ this year.
As soon as they're making 50K plus a year because if you're under 30 then you will retire a multi millionaire. Bank accounts earning .2% lose you purchase power (inflation) and it's the best kept secret in the world.
That seems like a huge fucking bargain for 1% of your net worth annually. I do most everything on my own and I still think I would jump on something like that if I felt comfortable with all the involved parties. I would guess it depended on how well all of the information and contacts where bundled. Like if there was one website/app for everything and one agent I could talk to that would talk to all the other parties for me. I would think long and hard about that.
for 1% of your net worth annually
It’s your assets under management (AUM) with the advisor, and most of clients do not have their entire net worth with the advisor. (Diversification!)
At the end of the day: it’s outsourcing services for people who don’t want to handle those items themselves, and/or don’t have the expertise/time. I absolutely think it is well worth it for a lot of people! Also, fees are slowly being decreased in the industry, and 1% for the full financial gamut instead of just the “investment management” portion is not bad.
Typically, fee based accounts have access to special share classes of mutual funds that offer lower expense ratios and no sales charges (like on an a share). So yes, advisors should have mutual funds in the account if they match the investment style/portfolio.
And besides, returns for mutual funds that are reported are net of expenses which means that if the mutual fund meets the benchmark then it's similar to an etf. The trade off is that investors in the fund should be getting something for the higher expense ratio, like active management, target date fund mechanics, exposure to thinly traded asset classes or regions, etc. There's a lot more to this business than lower fees/expenses. And imo, this is the exact kind of market to prove that point.
Being a qualified investor allows you to legally invest, but does not get you jack shit in terms of access. These deals are private equity, venture capital, and hedge fund investments. The tickets size has to greater than $200 million to get in on deals with the top managers
What do you mean by "tickets size"? The overall value of the client's portfolio or the actual size of the individual investments that the portfolio is making in a VC/PE fund or direct investment in a company?
The ticket size is how many $ one investor individual puts in a fund. The large fund of funds and other large institutions, will put sometimes over 1 billion with one money manager in return for additional access (I.e capacity rights), better fees, terms, liquidity, etc. most funds have minimum investments of $1, 5, or 10 mil. $250k is nothing to these managers, it’s only 5k a year in management fees and not worth the the additional time
Thank you for the advice as well as the insight from someone who works in the field.
I know that they both have decent financial literacy, and from talking to them it seems that they’re willing to pay for what is essentially peace of mind and not needing to constantly be on top of it themselves (they both still work very time demanding jobs).
I’ll keep in mind your advice about the middleman fees and bring it up to them if it seems to be an issue.
Fidelity is a good shop! I have no problem with them at all.
So my problem with Fidelity is that they expanded too quickly or something because their customer service went from pretty damn good 5 years ago to not great and overwhelmed.
Edit: for instance my friend called about her money market account and the guy somehow shut off payments from her checking account to her car payment. How the hell did he even have access to that much of her life?
Hmm definitely weird. It was required that as part of my training I take a tour of the call center and sit with an employee who takes customer calls and I was blown away at the speed and skill they can answer everyone’s questions. It was a very entertaining hour and a half. Guess there are mistakes every now and then lol
This won’t be popular to the redditors that think you can just buy a couple index funds and call it a day. You are usually your own worst enemy. When things go well you think your smart and get greedy and buy bitcoin at $20,000, or marijuana stocks but when the market tanks, investors think they can wait for it to go down more and sit in cash and miss the uptick. I saw this in 2008/2009. Investors waiting for Dow 10k on the way down sitting in cash. Then it hit Dow 8k, they waited and waited for Dow 5k, never got in until Dow 12k. Still did great but investors can be their own worst enemy.
Vanguard did a nice piece about how good advisors add about 3% to the rate of return to their clients portfolios over time with data to quantity it.
They should just create a new account with like $10,000 of funds and give that to the financial planner to manage. Then keep the bulk of their retirement savings in another account and mirror any decision made by the financial planner in the larger, personally managed account. Bam, massive savings.
Any decent FA is not going to manage a $10,000 account. Just think if the 1% fee. $100 a year? Yea no thanks.
... no. Just no.
AGTHX has one of the lower expense ratios for A share mutual funds. It is .63%. That comes with a front end load.
If they bought that in a fee-based account, you are correct that they become eligible for another share class. Typically F3, I, or Z class shares. F3 being what I offer and routinely the least expensive.
For that fund it would become RGAGX and cost .33%.
That means if that is the only fund they own then they are paying 1% plus .33% for a total of 1.33%.
That is the BEST CASE SCENARIO. My personal belief is that if you are paying an advisor they should be cutting out the middle man and be competent enough to do it themselves. This can be low cost index funds from multiple providers or individually selected stocks bonds (or a mix of those).
Another example. TEDIX is the A share of Franklin Mutual Global Discovery with an expense ratio of 1.21%. The Z share version is .96%. This is a .25% reduction which is typical because they just drop off the 12b-1 fees.
So in this case you would pay a 1% annual fee for advisory and then .96% for they fund for a total cost of 1.96%.
I know my share classes, thank you very much. I work with insividuals, institutional clients, 401ks, etc. I’ve had experience with every mutual fund share class there is. Hell I’ve even sold B shares in the past.
What the actual duck are you smoking? Go read all my posts in this thread and argue with me if you still think I’m against fee based.
Christ dude.
Also, get the fuck out with comparing C shares to fee based. C shares typically charge an extra 1% for 7-10 years before they then convert to, yep, A shares!!!!
Oh and yeah that big 5.75% load on an A share is for people with less than $50k.
My clients are millionaires. So... 0% load. NAV pricing friend.
While we are at it let’s take a look at your T Rowe price claim. TBCIX is the I share class for fee based. It is .57%. The highest other share class I can find for T Rowe (your choice by the way) is the R class used in 401k (they don’t offer a C share) RRBGX. 1.23%. That is a .66% difference.
Either way it is still more expensive than American Funds at .33%.
My favorite part is you can’t stick to one fucking argument. So what is it? Are mutual funds not more expensive in a fee based account (they are) or are C shares less expensive than A shares (they aren’t, across any dollar amount or time frame)?
Every point you made in that comment is wrong. I’m done throwing data at a blind man. Go test all your statements and educate yourself.
You obviously have some intelligence, but your knowledge is at a level that is now dangerous not helpful.
There are as many reasons as there are types of people.
My average client is 55 years old or older and preparing to shift from an accumulation stage to a distribution stage. They have, on average, a net worth between $1 million and $3 million. This doesn’t include their home, which is typically almost paid off.
They have also started worrying about stable income and market volatility. Not to mention that estate planning, and how their kids inherit their wealth, starts to become a focus.
Many of them were DIYers before, but are now more emotionally involved with their money now that they are needing to rely on it. They also worry what happens to their spouse of they were to pass, as they have been managing the money and making the decisions.
Lastly, they have multiple places to pull money and don’t know the best approach for that.
Many of them call me and include me in the discussion on almost every major monetary decision in their lives.
You are correct!
American Funds F3 shares can be very cheap and very effective.
I tend to go down the individual stocks combined with Vanguard and some select MF for specific bond exposure.
I was speaking in broad strokes.
Ok. So let’s say I need advice what to do with my current investments, which isn’t a lot, an influx of money about to come and the tax implications of all of it. Who do I see? I have questions but don’t think Vanguard is going to answer those and in honesty don’t know where to turn.
You're overreacting. This is a pretty standard practice and it's the most common method of compensation for investment advice. Around 1% is an average fee.
Whether or not it's worth it depends on the services provided in addition to the asset management, and if there are additional fees involved like commissions.
I would also like to add that I am sometimes more worried if a finacial planner is not charging a fee. The old adage is that if you are not paying for it, you are the product, not the customer.
Many advisors who do not charge management fees will be making money based on commisions for selling certain stocks, or other things which may seem like conflicts of interest.
1% may seem high compared to say, a low cost index fund, but not everything a financial planner does should be viewed through the lens of investment returns. I just met with a potential client about a possible investment advisor relationship. A large portion of the conversation was about estate planning items such as wills, living trusts, how to most effectively give to charity, and how to help make sure that the clients kids dont grow up with a silver spoon.
None of that necessarily increases investment returns, but it is all good conversations to have.
The fee of 1 to 1.5% is fairly standard. However, as the assets under management become larger the fee generally will diminish to .5% or so.
The RIA that I was affiliated with had several structures. Sometimes the fee for AuM was 1.5% and trades were not charged or were very minimal in cost (covering the basic brokerage costs assessed by the trading platforms)
Other times the fee was very low .5 and there was a standard fee to cover cost of trades...more than just the minimum.
Trades being stock trades, bond purchases, exchange traded REITS or Closed End Mutual funds. Stop loss orders. Options trading. It is crazy to put regular Mutual Funds in a fee account (IMO)
Before setting up a fee account, we (as advisors) needed to get a good handle on what the trading activity would be like. Many trades a year? Go with the higher percentage and little to no cost trades. Very little trading and mostly fixed investments. Go with the low percentage and pay for trades in the rarer instances that they would happen.
We also had a minimum amount of assets under managment to qualify for a fee based account. Too little of an amount and a stagnant account to boot.... and the fees could be more onerous than if the client just had a normal brokerage account.
As a licensed "financial and estate planner" any formal estate plans or other personalized financial plans were charged on a per instance occurrence. General information and general advice about financial planning was just incidental. To set up the estate or do other legal things, OF COURSE, the client is referred to a lawyer if they don't already have one. Many or my clients were referred to me BY their own lawyers or law firms that we worked with.
OP needs to know what kind of an account (qualified/non qualified) and what types of investments and trading activity normal for the account to determine if the fees are out of line.
Added: I am a retired RIA/Financial Planner 25+ yrs SEC registered....Not any more though :-)
Oops. OP did say what kind of account. IRA Sorry.
I would agree. The actual plans themselves, and the actual legal documents would be separate, and involve lawyers.
However, the general advice and guidance can come from a lot of different places.
a licensed "financial and estate planner" a
What exactly is this qualification? Is it a state or national regulation?
California requires the RIA the firm to be registered.
The SEC requires an investment adviser to register with the SEC if it has assets under management of at least $100 million or the investment adviser provides investment advice to an investment company registered under the Investment Company Act of 1940 (SEC Rule 203A-1). If the investment adviser has between $25 and $100 million of assets under management and must register with 15 or more states, the investment adviser must register with the SEC.
The IAR (individal person) working for the firm is also required to be further licensed.
Series 7, Series 65, Series 66. Life and/or Variable life licensed if you are making recommendations in that area
*Each IAR, except those employed or engaged by an investment adviser solely to offer or negotiate for the sale of investment adviser services, must qualify by passing the examination(s) as specified in CCR § 260.236(a). The examination requirements are the Uniform Investment Adviser Law Examination (“Series 65”) passed on or after January 1, 2000 or the General Securities Representative Examination (“Series 7”) and Uniform Combined State Law Examination (“Series 66”). *
And a further license as a CFP is also a plus. I had all those.
If you get caught saying you are a "financial planner" or "estate planner" without the licenses you are big trouble. AND YOU SHOULD BE, you fraudster. It took years of study and much continuing education to keep those designation.
I thought a "financial planner" is an undefined, largely unregulated term (as in anyone can call themselves that and sell certain financial advice). You mention a RIA, but isn't that specifically a firm that manages a certain amount of client assets? A financial planner doesn't necessary need that if they are providing budgeting, estate planning guidance, but steers clear of investment recommendations or advice. Even financial advisors with your qualifications aren't allowed to do client taxes or trusts.
I think also that a CFP is a marketing designation and isn't really a license (in the same way that a doctor, lawyer, or accountant is regulated). A CFP is really more of a marketing association (sure it has exams and requirements but that doesn't change its fundamental purpose).
I'm not a financial planner or advisor but I don't think I'm wrong as even Kitces says much the same things. Sadly it sounds like even when people has series xx license that often doesn't mean much about their knowledge level.
Notwithstanding the popularity of the “financial advisor” job – now up to #25 on the list of “100 Best Jobs” from US News, with a projected jobs growth rate of 27% through 2022 from the Department of Labor – the reality is that the term “financial advisor” itself is largely unregulated. The requirements to become a financial advisor are not dictated by whether the person holds out to the public as a financial advisor, and there is no such thing as a standalone “financial advisor license”.
"Sadly it sounds like even when people has series xx license that often doesn't mean much about their knowledge level."
This is quite true. While it does take knowledge to pass the initial tests, over time a person's level of knowledge can decay or they can just decide to forget. Continuing education is required to "keep up" on changes in the laws and to reinforce the knowledge.
It IS difficult for the client to really know how knowledgeable the advisor/broker/representative is. Referrals from other professionals. Knowing what licenses the person you are talking to really have. Reputation if you can find out who else has used them or their firm. /shrug
What grinds my gears, is exactly what you stated that almost any one can call themselves what they want and get away with it. Financial Advisor is the most abused and generally used by people who just want to advise you to buy an investment without knowing what your real financial plans and goals are. They are Investment Representatives. They represent the Investment and not the client.
A person who is licensed to "sell" investments might go ahead and offer some financial planning type of advice to smaller investors, without the background and required fiduciary duty. General advice- education, not specific to the client is ok and can be a good thing.
The salespeople misrepresent themselves and do this to just make a sale. Insurance salesmen are the worst. And those Trust Mills where they are just trying to "sell" annuities are also the worst. Annuities are a very high commission product. Lots of money in slamming people into a cookie cutter trust and a product that mainly benefits the salesperson.
My fee based clients were not just people who were saving for retirement or casual investors. Those people were better served outside of a fee based account and given general advice. I would often have a consultation and then decide that 'this' client is better off in an E-Trade or Vanguard account for several reasons, and refer them, to such and maybe see them later on down the road.
The clients that I am talking about generally had assets in the millions of dollars including financial investments, real estate, partnerships, LLCs, complicated estate issues, business succession planning, charitable giving issues and tax planning issues. Investments were important and a key component, but would be futile in the base plan wasn't in place and reviewed constantly.
We also would work hand in hand with the client's attorney and tax professional to make sure that we had all the correct information to put together a valid plan. It takes more than just one field of expertise to really make a financial plan. If your planner/advisor balks at conferring with others....that is a definite red flag.
I've been retired for a while now and for many of the reasons listed above. Plus...retirement is pretty nice. I can waste my time on Reddit :-)
So if the rep is "servicing" the account in the later years, the fee is going to be $50,000 per year on one account valuing a $1,000,000? Disgusting.
How in the world did you get to $50k... nobody is charging anywhere near a 5% management fee. Most people won’t pay more than $5,000 to $10,000 with the % charged dwindling as account size grows. A million dollar account is likely only charged between 0.5% and 1.0% = $5,000 to $10,000—> your advisor is compensated maybe half of that amount in a year while the firm they represent takes the rest. RIA is similar but will generally have more flexibility in how they charge.
Not at all. The contract for the fee service is negotiable every year.
When the account grows to a larger AUM....the client should demand a lower fee from 1.5% to .5% of the percentage of the total amount.
The client has the leverage in that they can take their account away whenever they want. They aren't trapped. If the client isn't getting value for their fees, they should move the account.
1% may seem high compared to say, a low cost index fund, but not everything a financial planner does should be viewed through the lens of investment returns
My main gripe with a lot of the advice here is that it's tailored only to young professionals. It works pretty well for me, as someone in that camp. But "just buy S&P500 admiral shares" is shit advice for a 55 year old with 3 kids, 2 houses, and looking at retirement in 2 years.
You need to look into a fiduciary. Financial advisers generally don't even do as well as basic index funds.
It’s likely that they’re already speaking to a fiduciary as their services are fee based.
Financial advisors can be held to a fiduciary level of responsibility or not. The two are not mutually exclusive.
Also, although this sub has a fetish with return comparisons, it isn't always good to look at a single metric and make all decisions based on that. For instance, an advisor that has a significant portion of their clients above age 50 is likely going to do considerably worse than an S&P index fund. Is that bad? Maybe, but it could also be good. 10-15 years away from retirement, clients probably are transitioning to more fixed income, low-risk securities. Yields will go down, but so does risk. Similarly, you may be averse to volatility, and so your advisor does more to mitigate loss at the cost of the best performance.
Fee based financial advisors give advice. They can use index funds, etfs, stocks, mutual funds etc to implement a strategy. The advice and the investment products they choose to use are two separate things. So saying financial advisors don’t even do as well as basic index funds doesn’t make sense. I think you may be talking about active money managers, stock pickers and the Wall Street like. Yes, they rarely outperform the market. As a fiduciary financial advisor, I use the lowest cost options with the lowest risk to help my clients achieve their money goals. A 1% fee is for advice, implementation, distribution and management of financial goals. It’s mostly advising people on how to take control of their daily money lives. Good financial advisors are doing this. They’re not trying to outperform the market. It’s not even what they’re hired for.
Most retirees can't shoulder the risk in a traditional index fund, like an S&P 500 index. They need tamer things. But bond index funds do exist. Still, having a financial advisor isn't all about investment performance. It's planning, managing risk, being tax sensitive, and hand holding through ups and downs.
Lifecycle funds automatically shift between stocks and bonds vs age at the risk profile you select.
Correct not an index fund. It is one "fund" though. In many cases it doesn't make sense to pick multiple funds over just picking one that has what someone wants, unless there's not one. (Despite places like bogleheads saying "three funds!" stocks, bonds, international or whatever and then recommending to rebalance their percentages over and over).
It's inaccurate to say that "A good index fund is 100% stocks." There are bond index funds too, e.g. VBTLX.
There isn't anything wrong with 100% stocks so long as you're diversified across industries and countries. There is always a market that is doing well whilst another is bombing.
I believe that rule was vacated by the courts, and was never actually implemented.
The DOL rule was vacated by the courts. But my broker\dealer had all the procedures in place, so they just continued implementing the plan. I think they expect FINRA to develop their own Fiduciary rule, so why undo all the work just to redo it later. I know most, but not all, firms are doing the same thing.
. I just met with a potential client about a possible investment advisor relationship. A large portion of the conversation was about estate planning items such as wills, living trusts, how to most effectively give to charity, and how to help make sure that the clients kids dont grow up with a silver spoon.None of that necessarily increases investment returns, but it is all good conversations to have.
Seems like something to talk to a lawyer about as well for the clients.
With a lawyer and a trust you can do these things if you give the instructions and do the financial planning yourself
But they also know how these things work in law which is literally the whole point of them. A lot of people butcher it when they try to make their own wills without understanding what legally is required or what is legally deemed to mean what without clear intention otherwise lol
I would say most people have this fear of messing up their own will but when you ask for a story of just one person who screwed things up by doing it themselves no one ever has any.
Lol read a wills and estates casebook and you’ll find hundreds of famous ones with unique issues not to mention there’s many (many) others that make the same mistake for most.
Ed: princess diana (unless I got the wrong royal family member lol) is one famous example. There’s many.
I have one. Was executor in father’s estate. A lack of clarity on quasi insurance policy (company paid not a real insurance policy) led to a large dispute among family members that I couldn’t wait to get out of the middle from. He had a lawyer, but he changed beneficiaries, and didn’t keep everything consistent. Not a fun time.
Probably.
Also huge potential to fuck things up if you write your own will and don’t understand crap like the rule against perpetuities or other ridiculous common law property principles (keep in mind the above rule(s) don’t apply everywhere but does where I live and it’s confusing as fuck for those who have been taught it).
if you are not paying for it, you are the product, not the customer
Is that really that old? Honestly want to know cause it seems like it was coined for the recent internet data mining era?
regardless I do appreciate the statement.
I am not going to sit here and argue, with someone who is just reducing my points to a single conversation on a single topic.
It is about more than just a single conversation or topic. It is about buying peace of mind and advice you can trust.
I dont inherently disagree with you but it is also cheaper to only eat instant ramen and rice for every meal and only take the bus/public transport, but you don't see that given out as advice very often.
My arguement is that you get more from a static relationship than a transactional one. As someone who is begining to do client billings, people get very upset when they call and ask for advice and then get an hourly bill for it.
Is the conversation on how to raise kids properly worth $20000++ per year? I mean, I'll talk to you about making sure your kids have good strong foundation, pay me 1% of your net worth
People forget that 1% is tens of thousands per year. It's just not worth it given that the information and docs readily exist online for all these basic will/trust situations.
I get where you are coming from, but honestly, I assume you are not dealing with High net worth individuals on a daily basis? I agree that people should be conscious of fees, but $20,000 to you is not the same as $20,000 to warren buffet.
So #1
When you are talking about high net worth individuals, your investment portfolio is rarely 100% of your net worth. You likely have significant real estate holdings, you probably own a business that accounts for a large portion of your net worth, and then also have things like deferred comp, retirement accounts, and other high value non-security assets such as artwork, cars, boats, etc. An investment portfolio is just a portion of that. 1% of an investment portfolio (and as others have stated, the % goes down as you increase in portfolio value), is maybe only 0.01% of your total net worth.
. #2 Time is money. If I make $500,000 a year at my job, that is about $240 an hour. If it costs me $5,000, that is worth 21 hours of my time. Can you do it yourself, OF COURSE YOU CAN. You could also built your own house, do all your own repair work on your car, and do your own taxes, but that is time you are away from your family, time you could spend doing something much more productive, or that you actually want to do. Why do you go out to eat? It is much cheaper to always cook at home. You made the decision that paying $10 for someone else's time was worth it to you. Also, most people suck at finding accurate information. r/personalfinance is going to be filled with posts about simple tax questions that are easily answerable by simply reading instructions. Why are people not doing that?
. #3. When you have a lot of money, people want to sell you things. Everyone is out to get something out of you. A good financial adviser should be someone who you can trust, who you know, and who you truly feel comfortable with. It is about having someone to go to for advice, because honestly, it might take 4 hours to research a specific situation that comes up, when a 15 minute phone call to a financial adviser would suffice because they have seen the same situation 4 times this year already.
. #4. You act like advice is worth nothing, but it is more than that. I work with some Goldman Sachs bankers on a client and those guys are available 24/7. If I shoot an email off at 8pm, they get back to me right away. I was talking to another banker who said a client once called them up and needed $50k in cash. The guy went down, withdrew the $50k in cash from the clients account, and drove it over to him in half an hour. You can't do that with E-Trade. There is a certain level of service that you can get by paying money, and for some people it is worth it, for others, it is not.
Warren buffet would be charged millions (1% of his assets), not $20k, which is (less than) one percent of my net worth. I bet he would find it a waste of money to pay millions per year for this.
As a high net worth top 1-10% individual, I still think it is absolutely a waste of money, specially when alternatives that are cheaper and easier exist.
Hiring a financial advisor isn't a zero time activity. It might take hours and days to get a good one, so there's a big time sink there also, on top of the fees. I'd rather use that time to educate myself and open my own accounts.
As old rich people who are tech illiterate die off, this sort of management fees will hopefully go away, as everyone can manage their own stuff easily online now
I'm an attorney and work with lots of advisors. In general, I have a pretty negative outlook on their capabilities and costs, and I personally do not have any interest in giving my assets to an adviser to be managed, since I have a fair understanding of how to invest my own funds, and the ability to stick with my asset allocation plan even when the market is going crazy.
However, although you and I might not be the target market, there are tons of HNW investors who are too busy to educate themselves, or just uninterested in doing so. Ultimately, it is a value proposition for these investors, and part of what they are paying for is protection from their own emotions/actions. You can pretty much guess what happens at the robo-advisors when the market tanks...investors panic, get scared, and pull their funds out of the market. I am actually curious what the asset flows will look like when Betterment, Wealthfront, etc. file their annual ADV updates in the next 3 months. We might get a good idea how "long-term" their investors actually are when we see what happened to their AUM.
HNW investors aren't really that much different from the average retail investor. Good financial advisors will push back and say, "WTF are you doing? Remember this long-term plan you agreed to when we first met? Nothing has changed fundamentally, this is an opportunity blah blah blah." Who knows when these people get back in market, but retail investors make tons of huge mistakes that go way beyond 1% a year. Most issues can be solved simply by establishing a solid asset allocation strategy and ignoring the noise, but some people simply seem unable to do so. For those people, advisors are worth the cost imo.
Yes, fees based on asset under management are taking 1% of the total assets under management. That is literally the definition.
Are you?
What are your goals? What is your intention with the money? Which funds do you pick, which bonds do you want to hold? Are you going to spread out over international markets, if so, what percentage should you have in international funds? In what countries?
If you have a couple hundred thousand dollars, sure, put it in an vanguard target date and go for it.
If you have a few million? Maybe you want some advice on how to do that. Also, as I have mentioned, it is about other intangibles, not simply return. Return is great sure, but there are a lot of other moving parts to that relationship.
The goal is $. You pick funds based on your risk tolerance. Maybe Ts, munis, or AAA if it's for retirement. It all depends and I can't read OP's parent's minds.
Never invest internationally for retirement unless you find something stable enough that's not tied to the US economy. Spoiler alert, pretty much everything is tied to the US economy in one way or another.
And there is very little difference in the overall amount. If you're really concerned about your bank fucking you diversify your federally insured brokers.
Definitely the right answer here, but a few changes. Avg fee in the business is around 1.25-1.5% and typically there aren't (and arguably shouldn't be) commissions charged on a fee based account. Though, there could be commissions charged on any other accounts that OP's parents have, like a taxable acct.
It may be pretty standard practice, but it’s scary if people are complacent about this, especially on this sub of all places. 1% of AUM extracts an absolutely enormous toll on your finances as your time horizon spans into decades. The power of compounding loses none of its strength when working against you. The average investor stands to pay advisors like this hundreds of thousands of dollars in fees over the course of their investing lifetime - and that’s if and only if the advisor also manages to match their benchmark index after fees (something 80-90% will fail to do after 20 years).
So yeah, it may be ‘normal’, but realize that baseline is set by an industry that is essentially predatory by nature, and relies on the fact that the majority of their clients won’t bother to do even basic math.
Receiving compensation for advice isn't predatory when the interests of the advisor and the interests of the client are aligned. An asset based fee, while not free of conflicts of interest, rewards both the advisor and the client when the portfolio does well
Your argument assumes an advisor provides -1% in annual return, when the data indicates a positive impact of 2-3%. It also assumes they're trying to beat the market and provide only investment management. The bulk of the value isn't in the investment management.
Even Vanguard, the champion of low-fee investing, has a study about the value a good advisor provides:
An AUM fee is paid to the advisor regardless of how well the portfolio does. They just get paid more the larger the portfolio is.
I'm sure you know this, I just want to clarify that only 1 party is guaranteed a reward every year, the advisor.
You mention data indicated a positive impact of 2-3%, could you cite that? I wonder what the baseline is, SP500?
EDIT: I see the 3% is mentioned in the Vanguard whitepaper you linked. I think it's interesting that 150 basis points are attributed to 'behavioral coaching' AKA an advisor reminding you not to sell based on current negative headlines.
It's easy to underestimate the cost of getting new consulting clients. In almost all cases, the numbers work out better to keep and grow business with existing clients, than to churn through clients rapidly.
Keeping the top of the marketing funnel full is expensive. That's especially true in consulting relationships where clients expect personal trust, like with lawyers, doctors, accountants, and yes, financial advisors. It's hard to land new, high-value clients through high-volume marketing tactics like paid campaigns.
Just like with getting a job, the best clients often come through networking and referrals. And it's hard to keep that going if most of your clients feel like they're getting short shrift or bad advice.
This is a long way of saying that the financial incentives probably line up differently from the way you think they do. Churning through customers is an expensive business strategy that usually depends on high marketing spend, and gets more difficult the more "trustworthy" the service needs to be.
MOST people are not con artist man. You think someone can set up a career like that? Good word of mouth is how you get as many clients as possible. Like the study says, a lot of financial advising is all about people skills. Tell people not to panic and helping them psychologically through the tough times.
With that said I know CFPs that charge 1/3 of 1% and the fee isn't worth it for me, but I get it.
The risk is not, however, apportioned equally. Say a client has $1M under management. At 1% that’s $10,000 annually for the advisor. If the advisor screws up, and they lose 20% of the clients money, the client loses $200,000. The advisor loses $2,000. At most $10,000 if the client leaves.
However many advisors take AUM compensation and then also receive commissions and other compensation based on what they buy. It would help to start by having a clear “brand” for advisors whose compensation is solely the AUM fee.
I read the first few pages of that Vanguard paper and the value largely seems to be in preventing clients from making big mistakes. It basically acknowledges that an advisor isn’t likely to beat the market especially after fees. If someone has the discipline to simply choose a target date fund and keep it in the market during downturns there’s not much left to gain. Of course not everyone does.
This is far too broad of a net to cast. In most cases now a days in an advisor relationship like this, the client is paying for investment advice in terms of asset allocation, fund selection, and planning advice.
These advisors do not tend to have a benchmark they are trying to hit as they are allocating capital between passive/active managers, geographies, and asset classes to manage risk/return. The main value proposition a fee based advisor has is the ability to invest this money in a reasonable and diversified fashion and use firm research to select funds that are stable and will maybe outperform.
Financial literacy varies greatly from person to person so having an advisor can be a necessity especially for someone who works and can’t follow markets daily. Without an advisor an individual could easily be purchasing an inappropriate share class, allocate capital contrary to their risk tolerance, or not diversify.
Like any industry if you receive a service you do need to pay for it.
You are talking about the benefits of having a financial planner which we all agree. The insane thing here is the rate. 1% of your TOTAL retirement fund EACH YEAR? That is fucking insane. Year after year, every year, they look at your TOTAL account and take 1% of it? Every year, they take 1% of whatever money you have saved? Do I get this right? That is insane, sorry. The compounding losses over the years / decades will add up to an enormous amount. I'm not a US citizen but I really really doubt this is normal and everyone does it this way.
Like say you grew up to be a responsible adult and started getting professional help in your 30s... When you supposedly retire, close to half of all the money you'd have is lost to your financial planner (1% every year + the compounding gains you lost). Again, that is insane.
Dude, more 'active' index funds can easily eclipse 50 bp in fees...100 bp for an actual person to manage an account is hardly crazy. Whether you're better off for that extra 50 bp is a different question. Your arithmetic doesn't hold regardless though (you completely disregard portfolio return when making your 'half' claim)
His claim of half is dramatic but I think your claim of 50 bp in the index funds we're investing in isn't correct either. Most of us are probably around the 15 bp (outside of 401k's and having to pay fees to the companies running the program for our employer's) in Vanguard / Fidelity index funds, if not better. 85 bp is a huge jump for those of us that are comfortable balancing our own index fund portfolios throughout the year.
'Active'...for basic broad market equity funds, you're right that teens and single digit fees are common (have one Vanguard fund priced at 4 bp). For thematic or otherwise more 'active' funds (sector focused, equity factor, what have you), hopefully more similar to what an FA would be trying to do, 50 bp or more in fees is pretty common.
This is the correct reply - most people have lives to live and the knowledge that someone competent is at the wheel is comforting enough. Also the "half your money" statistic the OP throws out there is disingenuous - that implies you have all the money you'll ever have when you're in your 30s and you never add anything, which would be a crazy scenario.
OP also assumes the investor never has any serious money and will never panic sell. People like OP in their accumulation years worry so much about “returns” cuz they haven’t seen an actual loss of value in their lives. These are the people who are experts in everything. It’s funny-why doesn’t the wealthy just invest in SPY. Way better performance than everything else!
That addressed neither part of your claim. That was Buffett outperforming a hedge fund by using an index fund. (By the way, why doesn't Buffett use index funds exclusively at BRK?)
You can lift weights alone or use a personal trainer. You can work through personal issues yourself or talk to a psychologist. You can change your own oil or go to a dealership. In each case, the professional knows more than you do. There's a cost. If it's not worth the cost, feel free to do it yourself.
Well, it’s normal in the US for those with sufficient assets to be invested and managed.
I hear ya. I’m always surprised as well. I think what’s also surprising is that this is framed in terms of someone getting paid for professional advice. Um. Okay, charge me a flat-fee then, not a percentage which you get no matter what. The client assumes literally all of the risk here, and the advisor none of it.
I understand financial advice is valuable. But if most of the “gains” are in the financial advisor convincing you to keep your money in the market, 1% of your entire invested amount seems like highway robbery
There are very good advisors out there who will provide advice for a fee, but many of the best in the business use the AUM model because it's easy and keeps incentives aligned. Clients who want the best generally have to pay for it. The ongoing cost is also there so the same guy will have to continue to stand behind the advice into the future as opposed to just one-and-done. Lastly, very few clients should actually be paying over 1%. Many RIAs and even larger brokerage firms can provide investment advice and financial planning for less than 1%, especially for higher net worth clients.
The reason most people fail to retire or run out of money is not because they are paying a planner, it’s because they do not know what they are doing. If your opinion is the extra 80 basis points you pay to have someone in your life who knows your goals and will keep you on track when you want to make emotional market decisions, does not justify the price, then by all means do not hire one.
The reason most people fail to retire is that they don't save enough.
That’s not insane most of the time that is essentially from performance. Most investors over a long time horizon could expect to earn around 5-6% average return the 1% really isn’t even paid on the principal of the investment but the earnings. Yes over the long term you’ll pay your advisor a lot of money but you’ll pay anyone a lot of money if you pay a monthly fee to them.
It is a service and like any service it has a fee and generally the more money that is invested the lower the fee gets. Plus it’s not like it’s the only option any investor in the US or elsewhere who believes it is too expensive is perfectly able to place their money at Schwab or Fidelity and pay no fee and manage the balance themselves.
Most investors over a long time horizon could expect to earn around 5-6% average return the 1% really isn’t even paid on the principal of the investment but the earnings.
If 1% is on the earnings that is entirely different. 1% of your total account is VERY different.
And there are no active money managers that beat the market in the long term, I think that was settled long ago.
So again, I'd be willing to pay 1% of my yearly growth, even a flat fee whenever it is negative as long as they save me a bunch of time. Hell make it 2% if that is the case. But 1% of your entire account is a different matter. Again, if you start early, 1% of your account means that by the time retire you essentially give away half of your money.
So some math.
If I start with a $250,000 IRA (fairly standard minimum for a fee based manager) a 30 year time horizon 5% annual return and 1% AUM here are some stats. This assumes I contribute to this IRA at the current max $5,500.
I would earn approximately $900,000 in return I would pay approximately $177,000 in fees or around $6,000 per year. This means about 20% of my performance would go to fees over this total period but no principal would be touched by fees. My ending account value would be approx $1.1m. Is it expensive? Sure. But based on the value of the investment/estate/planning advice you get you can make the call if that’s worth it for you. You also should factor in that your advisor probably gets 45-50% of that fee and the brokerage takes the rest.
I also did a second example where the advisor makes 1% of the earning on your account based on the same assumptions.
In this case over the period you pay $10,500 in fees or approx $350 a year. Now do you think that over a 30 year period only paying that much is reasonable? It would be impossible to make any money as an advisor and the size your book of business would have to be to keep your office running would be impossible to manage.
Financial advice is a service, advisors aren’t trying to beat the market the funds are. Advisors are trying to allocate capital in a way that works with your long term goals and has a risk level that works best for you.
That’s not a straight comparison since a CPA only does your tax return once per year and they are billable hourly. A financial advisor will monitor your account daily and meet with you throughout the year, also the brokerage custodies the assets year round which is part of the fee.
But financial advising is really hard work. You have to recommend low-cost index funds to everyone. They deserve 1% of everyone's money.
And there are no active money managers that beat the market in the long term, I think that was settled long ago.
This is patently false. The average Joe and Jane might not have access to these outperforming active managers, but they exist. There are alot of elite hedge funds and family offices that manage money for high net worth individuals and absolutely kill it.
Source: Works for active money manager that has outperformed market for 30+ years.
You making the incorrect assumption that the financial advisor is adding zero value to your Investments. Most people only make two to 3% per year on their Investments because they jump into and out of Investments at the wrong time, the main purpose of the financial advisor is the keep you invested, to talk you out of selling when prices are low.
Oh please, this is ridiculous. You literally have no idea what you are talking about, nor the work that comes from most portfolio management teams that manage money and provide advise. If you don't like it, stick your money in a nice mutual fund charging a fee north of 2%, and google the rest. There are many parts of the industry that are predatory, but a fee based model for managing money is not one of them.
Most people don't need full service financial planning and most financial planning services don't provide an extra 1% annual value.
What's the point of paying someone to fix your computer, build you a fence, or plan your event. You can do all of these things yourself as long as you're willing to learn and put in the effort, but not not everyone wants to do that. Most people have no idea what a "put" is and instead choose to rely of the advice of a professional.
Most people have no idea what a "put" is and instead choose to rely of the advice of a professional.
If you are buying puts as a form of investment you are doing it wrong.
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Nothing wrong with using a protective put as a hedge against an aggressive long investment.
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I used that as an example because the person I replied to mentioned snap puts.
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That wasn't my point.
They don't have special info and yes you should put it in a low cost index fund and "manage" it yourself.
Also, it's not just about return on your stock investment. It's about whole financial picture with your particular situation in consideration including income, spending, net worth, what asset class they are in, are you under insured for your net worth, what age do you want to retire, do you want to pay for your kids college education, are you maximized for your tax strategy. Sure I go to my insurance broker to buy my insurance, I go to lawyer to do the will and the trust, my CPA does the taxes every year, but none of those people look at my financial well being and the plan as whole for the next 30 years.
For the same reason you get a mechanic to rebuild your engine or a doctor to operate on you
You have access to institutional class shares?
Also, what's your time worth, and are you both interested in and committed to doing it yourself? Do you have a basic sense of the economy going forward into the next couple of quarters? How are you planning to hedge against uncertainty? Also, you mentioned SNAP puts. Options trading is too tactical for most financial advisors unless they are actively running a hedge fund for you. How much of your time do you have for options chain analysis?
There are a lot of people who mow and fertilize their own lawns, but there are also a lot of people paying the lawncare guy/company $50-$100 every other week to not have to bother too.
Sorry but this is a load of shit. The only value if professional advice is in tax planning. Market timing, active fund management, risk hedging strategies, etc. are pretty much guaranteed to underperforn the broad market over any reasonably long investment horizon.
Most people with 10+ years to retirement should be maxing tax advantaged accounts and loading up on VTSAX. The 'pro' advice is just a drain on long term performance.
Do you have any idea how many hedge funds went bust during the financial crisis or have done since? Sure some Will have outperformed but on average they absolutely did not. Picking the winners is even more difficult than picking individual stocks as hedge funds have less transparency. Any I doubt there are many at all that have outperformed net-of-fees from 2008 to today. Go have a look at how active equity funds have perforned this year too.
I was being facetious with the SNAP put comment. Do I gain much by having access to institutional class shares? I was just planning to stick to low expense ratio index funds now, and as I get older (less risk tolerance) move them into bonds and more conservative investments. I’m sure at some point it makes sense to have somebody manage your money but with the internet and some basic research I feel like managing anything less than 2 mil or so is pretty reasonable to do on your own if you’re just planning for retirement etc.
You may understand your investment objective, but have trouble with the execution. Majority of financial planning is focused on objectives such as estate planning, spending (some systems can give spending feedback on market returns), social security strategies, Roth conversions, health care cost planning, philanthropy (gifting), financial psychology. As you get older, your interests change from micromanaging how much money can I save to how can I best set up my present and future for myself/family. It can be beneficial to get a 3rd party to look at a finances with an emotionally detached opinion.
I believe the ship has sailed on most investment strategies, where the money isn’t made on selling mutual fund products designed to beat the market. With the majority of common investors, index is the way to go.. it’s simple and it prevents most investors from screwing up their goals. Active funds CAN beat the market long term, but you need to be very disciplined and pick lower cost, high quality managers to do that which is a task in itself.
Not the physical act of trading, but executing a long term financial plan with your goals.
A good analogy is a personal trainer. You may know the correct lifts and exercises, but having a coach to keep you on track for your goals can give you a better chance to achieve them.
I work at a brokerage firm and many of our clients have $10 million or more in assets and demanding careers. They want to call and say send these 10 wires. We just had a baby set up the accounts like we have for our other children. We're going to do all of our gifting through a donor advised fund figure that out . We need a higher credit line figure it out. Plus we run their financial plan twice a year and tell them when they are overspending. Make sure they are set up with wills, trusts, best mortgage rates, tax loss harvesting, when the CPA needs statements they call us., st up SEPs or 401ks for their companies. These are people with upwards of 20 or 30 different accounts. To say we don't deserve to be paid for our services is ludicrous.
We just had a client transfer everything to Vanguard at 58 years old. He wants to retire at 60 and he was presented with a plan and he thought he could do better. He's down 15% and called to transfer back because he wants less volatility. We said no. He also said he liked having an advisor to call and someone to help with his service needs. Oh well.
We have another client with $24 million and 46 accounts. He insists on quarterly meetings with lunch. Monthly customized reports. He calls in daily. Then he doesn't want to pay any fees. He's paying.45% on probably half his assets. Finally we fired him as a client and he refused to leave. He said he understood we were earning our fee and hasn't said a thing since.
Depends on the person. Many people are not that bright, disciplined or financial sophisticated and they don't want to learn. They need someone to say you have got to stop spending or you are gong to go broke. No guarantee because we have several people that have inherited money and decided they needed a beach house.
Your time is money. If you want to spend the time to learn the ins and outs of retirement investing and spend the time managing it cool. But most people would rather invest their time elsewhere.
Yeah, but 1% is $20000
It takes a few minutes, maybe one full day at the most, to figure out how to open an account online and fund it.
You're saying that few minutes/hours are worth more than $20000+++? Specially since that's how much time it'll take to find a financial advisor and have a few meetings with them anyways?
It might but be a good deal, but that's the actual answer. Not everyone wants to learn so instead they choose to pay someone to do it for them.
You're really oversimplifying it. For the top 1-10% of earners in the US they'd likely benefit from active management. I mean this in the sense that at a certain point it's not worth their time to do the work. If your time is worth $100/hour it can be worth it to pay someone else $50/hour to do something that isn't your niche. Yes, low cost index funds will out gain actively invested money in equities.
Also, a financial advisor as others have said should come after having a strong CPA doing your taxes. As means of revenue increase this gets incredibly more complex. Further, there is much money to be had in intelligent use of investments to reduces tax liability. This is something that many common people, wealthy or not, would lack the expertise and experience with to be as effective as a professional.
100% yes. We have over seven figures with a fiduciary and most years we break even on taxes or pay under $1000. 1% fee is worth it to us.
Can you post these studies? Everything I've read points towards the opposite (Bogleheads mainly)
So mainly gate keeping bear traps? I mean thats the bulk from that article. Thats not exactly inspiring?
I’m not sure where you got that. The article goes into depth and defines 7 different areas where advisors can add value. Making sure their clients avoid the “big mistake” is just one of them. Maintaining a consistent asset allocation (a concept almost completely foreign to this sub), regular rebalancing, and focusing on Total Return as opposed to Income investing are big keys in the investment management piece of what we do.
If you swing trade emotionally and lose 3% when the equivalent age appropriate index is up 10% then yes is say it's worth it
Most people set it and forget it.
This is false.
Most folks aren't swing traders.
I said emotionally swing trade as a metaphor for tinkering emotionally not the actual act of day trading/swing trading.
You're thinking of a 1% fee like an ETF might have. You need to think of it like paying for an advisor. Did you know there are over 60 different combinations on how to plan your social security withdrawal? That fiduciary will help guide you on what is the best method to use, among other things. He's not getting paid $15,000 a year to put all your money in a vanguard fund and never touch it again.
wouldn't that $15k a year eat up most of the annual social security payout?
Most likely less. Their fees lessen as you get more assets under management. Good tax advice and psychological support is definitely worth thousands of dollars for any millionaire. Whether or not it’s worth to do when you’re young is another matter. Usually not but I’ve known plenty of people who learned 50k or more financial lessons that could have been avoided if they listened to even a below average financial advisor.
As of right now yes. You have to remember a lot of the retirees right now need the help. They can barely log in to Fidelity to place trades etc. A ton of value is derived from helping with RMDs, setting up monthly distributions, assisting with death claims etc.
Say what you want but a good advisor does add value. Especially with people who didn't have all the investment information at their fingertips.
Once the new generations that grew up on the internet reach retirement they'll likely be more independent.
I can see your point there. I'm 31 so the majority of my retirement is just a hefty chunk going into my employers 401k. It's hard to justifying paying someone in addition to the fund managers. When I'm nearing retirement age I can see how the additional help could be valuable.
Trust me there's a ton you don't think about. I work in the industry and I thought the same thing. If your advisor actually does their job they're earning their fee.
Explaining the benefits of a financial advisor to redditors is always an uphill battle. This thread is hard to read. General sentiment here is that everyone should dump all of their investable assets into vanguard index funds and forget about it, it’s laughable
They don't have to beat the market by 1%, they have to beat what their customers would accomplish on their own.
That’s pretty normal. You have to understand that, if the FA is doing their job optimally, it’s not just investing that’s being done. They should be connected with your parents’ CPA and estate planning attorney to account for tax losses, exchanges, etc. Having a financial advisor is recommended for those who are middle to high income earners with large accounts. With real estate properties, charitable giving, gifting, inheritance, simple investing is not going to cover that. There’s much more involved and nuanced.
Thanks for the reply. I hadn’t considered these potential additional services that they may be involved in as well.
I’m mostly just glad to learn that the fee is pretty standard practice. I think I was a little quick to feel defensive for my parents. They’re getting older, but they’re still both very sharp and I shouldn’t be jumping to the conclusion that they’re being taken advantage of.
1% is the industry standard for percentage-of-portfolio structured advisors. I usually recommend going with a flat-fee fiduciary if they absolutely must have an advisor.
IIRC we pay about $700/yr for ours. (I don’t remember the exact amount because it was $600/yr for a decade, and she raised it this past year but I’ve only paid the new price once.).
Keep in mind that when we started with her we had like $150k in assets and earlier this year before the markets tanked we almost touched $1M, so percentage wise the fee has gone way down.
Edit: We use an Ameriprise advisor but don’t have any funds with them due to my wife’s job requirements.
It’s normal for a firm like Raymond James / Wells Fargo / Morgan Stanley or similar caliber. They typically do more than just manage the retirement fund and help with tax minimizing and estate planning, etc. It may seem like a lot to just allocate funds but hopefully they are adding more value than that.
Some do full concierge for that. Rental management, water plants, you name it.
It was part of what the trust company I worked with offered. In practice it was what they sent the new folks out to do, while they found someone for the sevice going forward.
This person works for a smaller, more locally based investment firm. I’ll ask them in the morning about other services that they get from it, but overall it seems like this 1% of AUM fee isn’t shady, which is what my original concern was.
As long as they aren’t being scammed I’m happy to let them manage their own finances. Thank you for your input.
NPR did a podcast episode on this. It’s definitely worth a listen
https://www.npr.org/podcasts/510330/secrets-of-saving-and-investing
It’s called Secrets of Saving and Inviting. It’s new in their toolkit series
I should have given you a somewhat more detailed answer (though it looks like this has been covered by others). 1% of the assets is fairly standard for a personal human advisor (almost everyone charges by assets, not on performance). You'll see some higher and some lower but 1% is fairly normal. If they don't necessarily need a personal advisor, there are plenty of "robo-advisor" options that are cheaper (wealthfront and betterment probably being the most well known).There are also some hybrid options which have robo-advisory elements but also give you access to an advisor (Vangaurd probably being the most notable). I wouldn't necessarily say they are being taken advantage of, but depending on what services they are getting, there are likely cheaper options.
Good financial planning isn't just returns. Tax and estate planning is a huge portion. How and when to allocate or reallocate. Making sure you don't pull out your funds at the wrong time or add at the wrong time. These are all things an advisor can help with.
Vanguard, the same Vanguard that has all the low cost index funds everyone in this sub preaches about, did a study that showed on average a financial advisor adds 3% on average.
It's easy to say index investing is the way to go because it's cheap, and very well can be the best route. However the investors knowledge and competence is important. Also, the older we get often our financial picture gets more complicated-in ways simple index funds can't offer.
FINRA’s Broker Check should tell you something about his credentials
1% of assets under management (AUM) used to be the standard charge. These days good investment advice/asset allocation can be had much more cheaply (think robo-advisors). If their advisor is providing other services/advice such as budgeting, tax planning, estate planning, etc. they may very well be getting their money's worth.
I’ll go along with them and see what services he’s providing (and where exactly he’s putting their money), but unless there is something clearly shady I won’t butt in. The purpose of them offering for me to come along was just so that I could be informed about their estate and funds in case something tragic happens to both of them, which I still think is a good (if slightly morbid) idea. Unless there is clear mismanagement of money occurring, it’s not really my place to speak up.
The fee is normal, but what concerns me is the lack of credentials, or not knowing the credentials. The highest credentials are combinations, such as CPA, JD, or CFA (chartered financial analyst--one of the hardest exams in existence) combined with the CFP®, certified financial planner. The CFP® or CPA/PFS (personal financial services) alone comes second, and the ChFC behind that. ChFC is Chartered Financial Consultant. IMO.
It sounds like they have a fee-only planner, so that's a good sign to begin with. I also find it positive that they wanted to have a family visit to communicate their estate plan. Comprehensive planners will do this, while a lot of people in commission-only roles are afraid of going there.
Edit: typo. Also, am on the way to CFP® certification. I just need experience hours.
Depends on the type. An LL.M in torts does nothing for financial planning unless you get REALLY niche.
True, but I wonder how comprehensive they get. To me, the CFP is the base credential for providing comprehensive planning.
Wow I just skimmed the comments and NOBODY mentions the most important thing. Size matters. If they are balling as fuck and have $50m, then 1% is outrageous. If they have <$1m then it is market rate.
I agree with other comments that it’s extremely important that the advisor is a “feduciary” meaning they must put clients interests above their own. In Canada many are NOT feduciary, so they strongly recommend that you buy the fund that makes them the largest bonus /commission, which usually works out poorly for you.
Agreed- scale is critical to making tradeoffs around transactional fees vs percentages.
I literally cannot take this post seriously because of the misspelling.
Also, if they're "balling as fuck" and have $50m then I guarantee you that they know enough not to pay 1%, so that's just a useless point to make.
Most FAs work on a tiered system, so 1% on assets up to 1M, .9% up to 2M and I see FAs that drop down to .3% at 5M. An advisor charging 1% for over say 2M is probably inexperienced with handling high net worth clients
Also go to brokercheck and look up the advisor. You’ll be able to see what licenses he has and if there have been any complaints about him
It's pretty standard and is why, unless you're pretty wealthy it's suggested to perhaps manage your own retirement funds. If they want to pay anyhow, well it's about average charge. 🤷
In my experience, people who do it themselves make poor decisions that make them lose money buying/selling at the wrong time, making emotional decisions, not properly using tax loss harvesting or understanding tax implications, going into suboptimal funds or drawing down their money incorrectly in retirement.
Thing is, the inexperienced 20 somethings on this sub “think” they have it all figured out, but over the course of their lifetime would be much better off with a low cost fiduciary.
We can agree to disagree here. Most people don't tend to invest at all hardly in their 20's. For the ones that do, there are tons of non-complex methods like using index funds, target date funds, etc. that are low cost and easy to understand. Many would be better off simply going with a more passive method like that rather than paying someone when there's no need for most to get too complicated.
Besides, even the "best of the best" tend to have trouble beating the market. With the technology and simplified low cost funds we have available nowadays, many people would be much better off managing themselves using these methods readily available to them. You don't have to be a rocket scientist nowadays to understand the basics.
Tax planning, why of course. See thing is, taxes aren't too complex for these 20 something typically. In their early 20's we're talking retail jobs likely and with free software like TurboTax, their taxes aren't going to be complicated. In fact, they can be done in about 30 mins correctly. There are also several calculators and other easy to use tools, although again likely won't be too complex for most. You don't need someone to do basic financial planning like budgeting. You should likely be doing that yourself if you're making average incomes. Again, not too complex for the average joe.
Social security and pensions are also manageable calculations as again, there are plenty of easy to use calculators. Especially for pensions which tend to give you a very specific percentage of your pay each month for allotments. Estate planning can wait until down the line or can be a one time meeting cost with many folks such as a lawyer. The average 20 something isn't too worried about leaving behind too many assets.
I am for encouraging folks and schools to educate themselves on the basics of finances. It should be part of a well rounded education. If your finances become more complex then sure hire someone to help you out, but for the average joe it may not be worth it to pay the extra fees.
This thread is about retirement age people with over 1 million in assets, not 20-somethings. There is a lot of value in that 1% fee that the clueless r/personalfinance kids are clueless about. If they had actual money or businesses they would understand the usefulness of a good fiduciary.
This thread is about investing in general no matter the age. You brought up 20 somethings specifically, not I. Fact is, for many people it is simply not necessary to pay someone 1% plus any extra fees to manage basic funds when most people's finances aren't too complex. As you approach retirement you can consider consulting. A fiduciary, but they are by no means a requirement. You seem set that everyone must use a fiduciary or they are wrong. So much in fact, that it seems telling that you likely have some sort of bias scouring your opinion rather than a neutral stance like my own.
No one says a fiduciary is useless. It is important to educate one's self about finances. You don't have to pay someone to do so. Not everyone wants or cares to be a business owner. There are plenty of simple ways to invest based on your own preferences that don't require a fiduciary to do so. That's just a fact. You may not like it, but it's the truth either way.
I’m not saying you NEED a fiduciary, but I am saying that most people make poor decisions that they don’t even realize that erodes their wealth over time. Most people are either not emotionally prepared nor tax aware enough to maximize their portfolios over 30-40 years. People on this sub have unwarranted confidence and think that buying a couple of Vanguard index funds is all it takes, when for most people, things get much more complex as wealth grows and retirement age comes near.
Again, self-education is fine. You don't have to get a fiduciary to manage your finances. People are capable of managing their investments if they so choose and have educational resources if they so choose. Again, if you choose to consult a fiduciary down the line by all means, but most people are capable of putting money away and following methods that have been proven to work several times over.
If your finances become more complex by all means go for it as I mentioned before, but bottomline most people's finances aren't ultra complex. That is why most people are capable of managing their finances if they so choose. It's a matter of educating one's self and you can avoid the things yiu mentioned quite easily.
A fiduciary doesn't guarantee great results either. They are an optional resource that can help, but certainly aren't a necessity to build wealth and growth. If you can avoid spending 1% of your growth most of your investment years and still get great results then of course there's nothing wrong with doing it yourself. If you approach retirement and want a consultation here or there nothing wrong with that either.
Normal. Also, remember that they are not stupid and didnt amass their retirement funds by pure luck. You pay people to work for you, no different than any other profession.
We came of age in a very DIY generation because we couldnt afford professional services for every single thing. If your parents know what they are paying for and trust their advisor, don’t ruin it by being a misguided redditer who chases the cheapest index fund. Cheap index funds may not suitable for your parents. It is their money, dont treat it like its yours.
Firstly, I appreciate the advice. Thanks for taking the time to post. Don’t worry, I don’t intend to manage their money for them; like you said it’s theirs and not mine and I’m certainly not qualified to manage it anyways.
My primary concern was that they were being taken advantage of or even defrauded because taking 1% of the total AUM seemed high/suspicious to me. Although I didn’t know for sure, and clearly I was wrong, which is why I asked for advice here before charging in with my le Reddit knowledge.
Well I'm glad you asked because I learnt alot from all the answers, thanks. 1% sounded bad to my gut too. I suppose it's only 1% of their invested money, not property worth or banked money. But a dodgy planner could say reduce property and put it all in funds and rub their hands together. Luckily everything is fine and it's not dodgy or anything to worry about. Good on you for wanting to take care of your parents though. I would like it if my kids did that when they grow up.
The best thing you could do is look at the detail level of their investments and see if it passes your gut check. How is performance reported? Are they in a lot of annuities or other instruments that generally have a high commission structure? You said the advisor was a pastor in a church, is this crown ministries or something similar?
Odds are you can’t change their mind if they like the guy.
Am Financial Advisor. Yes, it’s normal. Yes, it’s a ripoff.
Managing $100k requires almost the same amount of effort as managing $1M, but the client pays 10x for the latter.
Advisors retained like this only add value if they are constantly managing complex trading strategies or account structures. 98% of people could bypass an advisor by doing an hour of research online.
Get an online trading account, buy some different kinds of index funds (stock funds = more risk, bond funds = less risk), add savings over time, but don’t touch it. You’ll do better than with any advisor.
Telling someone an hour of research is the equivalent to a seasoned financial advisor is unfair careless... I'm not an FA, but their function can be critical to many people who either don't have the time, knowledge, or resources to manage a portfolio. A competent FA should make, or reduce risk, well in excess of 1% for their clients.
Yeah, I work in the industry and some people have NO idea or are completely incapable. A big part of the value an FA can add is saving them from themselves.
Hired an FA and have been very happy with the tax planning...saving us $$$$ over what I'd likely do myself.
Wow, this person clearly doesn’t work in the industry. For 1 million dollar accounts we offer portfolio management, tax loss harvesting, estate planning, financial planning with account integration, tax preparation, fixed income drawdown strategies and more.
So you’re either doing a crappy job, a salesman at a broker, but you’re definitely NOT a registered investment advisor that cares about their clients.
Or if they’re gatekeeping you from selling everything during a bear market. That’ll pay for itself pretty quickly, and some people need it to stay out of their own way.
Yeah, some people may need it, but to claim that is worth a percentage seems like highway robbery.
I mean, of course that’s a call you can make for yourself, and I’m not signing up to pay anyone 1% anytime soon, but don’t forget that most people don’t spend their free time posting on personal finance forums on Christmas. Like, there’s an above average base of knowledge here that not everyone shares. You think the difference between an index and 1% is huge? Think about the difference between investing and sitting in cash because you’re afraid of stocks or don’t know how to diversify. Some people just need advice. But if I had a high net worth I can imagine plenty of reasons besides that to want an FA.
but don’t forget that most people don’t spend their free time posting on personal finance forums on Christmas.
Just wanted to say regarding this specific point... well said. Touché. Made me chuckle
I guess the biggest problem I have with your statement is that far too many of them ARE NOT decent.
When I get into an argument with my FA over being in mutual funds, and they inform me that ETFs are “less diversified, and only a little more diversified than individual stocks....,” I want to shove 100% of my foot into 1% of their ass.
I guess it’s just a conditional probability. GIVEN I can find a decent FA, sure, he may be worth his price. But that given is HUGE, and it is being far too discounted here...
Just for the record; if you are in the industry and believe what you just said, then you are problem with the industry.
You should be working harder for your clients or you should move on to an industry that you are better suited for.
Stop ripping people off.
I’m an advisor as well and I can tell you that I am 100% worth every penny I charge. Im earning it even more during times likes these. Now, not everyone should work with an advisor. Those that do deserve to work with one that has a better understanding of what they should be doing than you do.
No offense, but accusing him of not knowing what he is saying, that he doesn’t provide value, and then claiming that you are 100% worth the value you provide, seems awfully convenient. It’s the fox guarding the hen house.
This compensation structure wouldn’t work almost with any other service. Imagine if a plumber charged you a % of how much your house was worth for his services. Oh and that was regardless of the outcome.
Saying things like “I’m even earning it more in times like this” implies you’re likely one of those people that believe they’re worth more now because they convince people to stay in the market when it’s not doing well. I’m surprised when people think this is a valid argument.
That’s like the plumber then further making the argument that since more pipes are breaking during winter it validates how he’s all the more worth how much he charges. Which odd, considering he changes how much he charges based how expensive your house is. He might say, “After all, think about how much more damage a water problem could possibly cause with a more expensive big house”. I don’t buy that. Irony here is at least in this example the plumber would be fixing stuff. With an FA it would be the advice (that mind you is plastered all over the internet) that you shouldn’t pull your money out of the market right now.
I don’t want to be too harsh, and I’m sure there are times where FA provide all the value of the % they charge, especially with more complicated situations. But in general, the argument used here seems really poor.
I get where you are coming from, and agree with it for the merits presented. However, I think you are missing the larger picture of my message to the other advisor.
He is openly stating he is over charging and that he doesn’t do any more work for a small client compared to a larger client. He then tells that person to not use financial planners.
This is like a plumber telling people that they charge an annual fee for plumbing work based on the size of his client’s homes (larger more valuable homes have more plumbing). Then saying that he does the same work for bigger homes and smaller homes alike. Not only that but he goes on to say that plumbers aren’t worth it because all homeowners can do their own plumbing.
Meanwhile, as a plumber who knows quite a bit about plumbing, I find that statement to be so ridiculous that it is hard to fathom. It represents a lack of understanding of the pay model and the craft.
Let me give you an example.
My smaller clients ($100,000) pay 1% ($1,000). For that I do almost more than a $1,000 worth of work. I see it as an investment into growing a larger client down the road and helping them out. There are also a lot of things smaller clients simply don’t need help with that save me time. My larger clients ($5-$10M) pay 1% minus the discount for assets under management that exists on a curve. My $10M pay me around .5% while my $1M clients pay me around .75%. So for a $1M client they pay me around $7,500. For that I do a LOT more than my smaller clients. However, because of the size of their accounts the things I do also have larger impacts. For instance, I engage in tax/loss harvesting for a business client. When doing this I consult with and incorporated his CPA and real estate agent, so we didn’t miss any opportunities. His tax savings from this resulted in $5,000 in found money. That’s one of a variety of things we do every year.
In short, while that business model seems odd on paper that would be because people are going into the particulars of how and why service scales. It also aligns incentives, which is arguably more important for my high net worth clients. If I lose half their money, my income reduces by half.
My larger clients have bigger and more complicated accounts, tax issues, estate plans, and “controls” on their money (like trusts).
The original poster is dangerous in his simplicity and puts them in a category of advisor that feels they are really in “sales” and not a “service” industry. I despise that type.
For instance, I engage in tax/loss harvesting for a business client.
But you don't do this for clients with < 1m? Do you offer discounts for other clients who don't have such complexity?
My larger clients have bigger and more complicated accounts, tax issues, estate plans, and “controls” on their money (like trusts).
But if they have a very large account (10m+) and don't have any of these complexities, do you charge them less? No?
I think a lot of people would trust FAs more if they used a fee for service model. And if they charged everyone the same fee for the same service.
But you don't do this for clients with < 1m? Do you offer discounts for other clients who don't have such complexity?
I don’t do it for clients with less than $500k in a taxable account. Yes, those clients are charged less in pure dollar terms. More in % terms.
To understand this, take it to extremes. Want me to manage $10,000? I get paid $100 per year. That’s 1%. It frankly isn’t even worth my time. I make around $175 per hour. So that means if I spend more than 30 minutes on that client then I’m technically losing money.
Now a $10,000,000 client is charged more in dollar terms but only .50% ($50,000 annually). Now, in this situation we typically talk about 2 hours per week along with about 2 hours of work per week to answer questions they wanted me to research etc. Thats about $240 per hour.
A $10,000 client simply doesn’t have the need for all the services that a typical $10,000,000 will request from me. If they did, I would flat out decline the request.
But if they have a very large account (10m+) and don't have any of these complexities, do you charge them less? No?
Excellent question. The answer here may surprise you... but yes, I charge them less. The way I do that is I hold their uncomplicated assets outside of the fee-based sleeve. We do simple activities like CD ladders, tax free bond ladders, etc. Those I get paid differently and it is actually free to the client.
However, most of my high net worth clients share similar complexities.
I think a lot of people would trust FAs more if they used a fee for service model. And if they charged everyone the same fee for the same service.
There are many advisors that do this. However many charge a flat fee plus additional activity fees. When you start to add it up it works out about 1% for someone with $500k. Significantly more expensive for those with less, and about the same for larger clients. Maybe a bit cheaper for ultra high net worth.
It’s not a perfect system, but at the end of the day the payment model matters less than trust.
My clients trust me because I am crystal clear on what they are paying me.
Yeah I wish more were like you. My mom pays 1% of assets for an advisor that maybe speaks to her once a year. Maybe. Yeah there was some work initially to get her investments set up and some estate planning, but that was done years ago. Damned if I know what that advisor does for her now. At least he isn't sucking more money by actively trading.
Sorry to hear that. Sounds like she may have a reactive advisor. At the end of the day this is her money and she deserves to be comfortable. She needs to have a meeting with him and ask what she is getting for that, then decide if it is time to interview new options.
Market is almost in bear territory. Time for her advisor to call and reassure, rebalance to take advantage of situation, and set expectations.
I’m making 200+ calls before Friday.
I do have a concept of what it takes to manage a $1M and $10M portfolio. For me, it's been a few more sheets on a spreadsheet, I file a few more tax forms every year, and my return is a bit longer. Whoop dee freaking doo.
I see this whole appeal to "you can't know what it's like, because you've never experienced it" come up over and over as a defense for these kinds of fees. I used to kind of believe it. Then I got the kinds of money you're talking about, but the complexity you're talking about somehow never appeared. Vanguard works just as well as ever. Infrequent rebalancing is still best. Frequent trading is still a bad idea. Alternative assets are still generally a ripoff, assuming you're not getting into Bridgewater or Sequoia or another consistent outperformer like that (let me know if you can...).
So I guess I have to ask - concretely, what would you do for a client with $1M vs $5M vs $10M that justifies a percentage fee, and why not just charge an hourly rate? Because hourly rates scale really well with complexity, as lawyers can attest to. The reluctance I've seen to charge hourly raises a lot of questions of what people are actually getting for their money.
Lawyers bill in 6 minute increments, and do that on every call and email, so it doesn't seem impossible... So does my accountant, now that I think about it.
Do you help people sell businesses?
I knew someone would bring this up. The thing is, the plumber would charge more for the pipes in a bigger house only if he was doing more work. And even then its still not proportional to the cost of the house but rather the amount of work. And of course, the same if he was simply unclogging a toilet. That’s the point of my example. If you’re doing more work, sure- charge more for it. But I highly doubt the difference between managing $200K and $100K is that it takes you twice as many hours or twice as much work. You could convince of more work complexity going from $100K to $1mill- but even then, I doubt it takes an FA 10x as much work. This is the point I’m trying to make.
Well, if it really is related to how much more work it is-even if it doesn’t scale perfectly- I understand why you’d feel it’s valid. But I guess from all the reading I’ve done, and especially the index-based investment philosophy normally accepted in this sub, color me skeptical about all that supposedly necessary extra work that has to consistently be done to actually provide more value (and that is 7x more work in said scenario). But maybe I’m wrong, and I’d love to read about all those additional strategies if I’m missing out on it.
I know you guys do other stuff as well, if I was the client I’d just want to pay more for that in a flat fee, not as a percentage of my AUM.
Anyway, at the end of the day, it’s a free market. People are happy paying you and getting a service they feel is valuable for an agreed upon price. I mean, we’re all trying to make a living. I just haven’t encountered enough information to feel sold on the idea that the value is actually there when paying a percentage of my AUM. At the very least for me personally.
Thanks for the discussion.
People with more money have more complicated financial needs.
I’m with you that there is no real difference between a $50,000 client and a $100,000 client. However, there is a massive difference in needs and ways we can add value from a $100,000 client and a $10,000,000.
Is it 10x more complicated to manage a $10M client and a $1M client?
Why wouldn't it be better to just charge an hourly rate like almost every other professional out there?
We do it both ways. You’d be surprised how many people choose the AUM fee.
Typically they like the incentivized concept. I lose half their money and half my income. I grow their assets and grow my income. If I charged them hourly I would be incentivized to “do stuff” and “do stuff slowly” for them.
It’s similar to the argument against commissions. If I make money whenever I rebalance your account, then rebalancing happens a lot. Even if studies show that rebalancing annually is almost ideal and that the more you do it the less effective it is. Also, churning.
It’s not perfect but it also isn’t as bad as you are making it out to be.
Oh and a fee based on dollar amount is very very common. Realtors, car sales, foundation management, charitable fundraisers, property management, fleet management and maintenance, etc.
I mean, if you lose half my money, you're losing 100% of your income from me, regardless of which way you're being paid.
Doesn't being a fiduciary cover the whole rebalancing more than is good for your portfolio thing? If you know it's bad, aren't you legally bound not to do it?
You should probably never bring up the structure of REALTOR's compensation as a valid justification for anything. Or traditional models of car sales.
I just responded to someone else with a more detailed response. Essentially though, this feeling comes from it being an oversimplified answer.
I do 10x more work for my larger clients than my smaller clients because they have more complicated situations and we cover a lot more ground.
I have clients that pay me $1,000 and I meet with them twice a year. I’ve got clients who pay me close to $50k and we are on the phone every other day (many of them have offered me full time jobs, offering significantly more that they are currently paying, so I could work with them exclusively and be even more involved).
It just comes from not understanding what a full service advisor does for different client types.
You don’t believe in the value you provide? Lol
There’s also a lot of people who don’t want to look at their finances at all, much better to pay 1% to have someone manage it vs leaving it in god knows what for years, and into retirement with inadequate planning and not enough money and be screwed
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Get Vanguard retirement account
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Put money in a target date fund for the year that you plan to retire.
Forget what you were originally doing and just play with the equations and copying them all over
There are plenty of calculators online that you can plug numbers into to determine how much you’ll have based on how much you save, accounting for inflation.
That said, like most industries, the money is in people not having the time or interest in learning these things for themselves. So, that’s where the financial planner comes in.
I do suspect financial planning would be one of the easier industries for people to learn on their own though.
Depending how old you are, that's a great way to start if you're young and just starting out. You have a long time to learn more as your retirement savings grows. It's not like you have to cram a month before you retire to learn this stuff.
Here’s a short list of services offered by fiduciaries:
Financial planning with account integration. Budgets, mortgage plans, setting up college savings funds, social security planning etc.
Tax planning, calculations and forecasting based on income, business taxes, relative value calculations for different strategies.
Estate and trust planning.
Portfolio maintenance, rebalancing, tax loss harvesting etc.
Fixed income draw down planning, with pensions and social security estimates.
Many advisors do bill pay and daily budgets for their clients, especially high worth ones.
For many fiduciaries this is included in the ~1% fee. Or some combination of the above.
Let's say I have $10M. If you charge 1%, that's roughly $8,000/mo that's coming out of my returns. But let's say you scale it down to 0.5%, or $4,000/mo. Let's keep in mind that that's enough to house an entire family quite nicely in most parts of the country.
What of those things you mentioned makes that fee make sense? What scales in complexity between $1M AUM and $10M AUM? Because as far as I can tell, as much as advisors like to say it is, it's not actually much more complicated or time consuming - the amounts going into the different parts of the portfolio allocation change, and maybe you add a few more asset categories to get more diversification, but otherwise, it's mostly a fixed amount of work to do things like rebalancing, tax loss harvesting, college savings funds, budgets, etc.
I've heard a lot of pitches from a lot of private wealth managers at Credit Suisse, UBS, Morgan Stanley, etc. etc. as well as smaller boutique banks, but I can never get a convincing answer as to why what they're offering is worth the many thousands per month I'd be paying them over my very simple Vanguard+Google Sheets rebalancing aid setup.
My kids' 529 college savings plan took like 2 hours of research to set up.
Personal corporation? A couple hours with a good accountant is plenty to get that rolling.
Alternative assets? The fees on those funds are almost universally atrocious, and generally don't even perform very well.
The closest thing I heard to something that seemed unique and maybe worth it was geographic diversification and hedging political risk with the Swiss banks, homing assets abroad. But it seems like in order to be really worth getting into those exotic things that would actually make using an advisor worth it, you'd need to have much more than $10M.
So please, enlighten me, what makes advisors worth their percentage fee in this age of excellent financial software and broad low fee index funds? Why are we not just paying them hourly like almost every other professional?
At AUM of 10 million dollars, most would only charge around 0.25%. The price starts dropping really fast above a few million. Also, many fiduciaries do charge hourly or by retainer if the funds aren’t hosted by their custodian.
For people in the highest tax brackets, there is much more work to do. First, they likely have 5+ accounts, slated for different projects, savings goals or businesses. Or they will use multiple accounts for present income, future income and growth/speculation. Each of these are tied to different bank accounts and require withdrawls/deposits, rebalancing and account management. Many also use these funds for large purchases.
Additionally, their business assets may also be with the advisor and require completely different tax considerations.
High worth investors also make speculative investments in direct partnership programs, IPO’s, and private equity where the advisor prepares research reports for the client.
Then, the math is just different. Municipal bond funds for example are better for high tax brackets, but you need to run the scenarios to see how much they will save on taxes in different municipalities, states, or even local offerings.
The reason nobody can explain this to you is because this sub is filled with 19 year olds with $500 in SPY, pretending to be financial experts.
I’ve talked with a bunch of wealth managers, none of them have ever successfully made the case for their fees, so it’s not a problem of Reddit’s demographics. But thanks for your two cents.
It costs the same in labor-rates. But you're not factoring in the added liability the company is absorbing.
If someone asks you to save $1 for them, and keep it safe, you might charge them nothing because there's virtually no risk involved. If someone asks you to save $1,000,000 for them, you might want to charge them a fee. If you lose the $1,000,000 they will come after you. And it won't be pretty.
very essence of giving them more money
I think you have no idea what a financial advisor does. Nobody is "giving them money", at least not the money that they are managing. How on earth would they lose the $1,000,000? It's being held by a financial institution, not in their basement...
· 4 yr. ago
Emeritus ModeratorPersonal attacks are not okay here. Please do not do this again.
Actually the Optimized allocation looks more like a glidepath going from 80% equity 20% bonds towards 80% bonds and 20% equity.
You will be better off with fixed 40% equity 60% bonds if the alternative is to pay someone 1% every year for 30 years due to compounding returns. 1% is a tremendous drag on performance over a long period of time.
It’s semi-normal. Many of my parent’s friends have done this for years. It’s expensive. I’m not sure it’s a total rip off. Many of these folks are clueless about personal finance/investing and don’t care enough to learn on their own. But again it’s expensive.
Most industries, including personal finance, are being taken over by technology. Just because your parents have the same resources available to them that you have (like the Internet and all its resources) doesn't mean that they have the full understanding and drive to use it. Many things are easier now than they were before but as we all know, habits and ways of life are not always easy to change.
Robo advisors still charge a fee, but offer nothing compared to good fiduciaries, who work with their clients doing full financial planning, estate planning, social security and fixed income strategies, and tax planning for high worth clients.
They offer a tiny fraction of the overall services offered, particularly for wealthy people that have different needs.
If I could walk into the office of someone I knew was competent and looking out for my best interests/goals and wasn't trying to make money at my expense, I would gladly pay 1% of my net worth every year to gain their advice, especially if they would do the leg work and I just had to sign on dotted lines and pick a few preferences while they controlled the distribution of funds to a point. I can balance a checkbook, but everything else (saving for retirement, planning for a house, buying a house) seems so complicated I don't know where to begin.
You can put in his name at this site for a quick and free check on his credentials: https://brokercheck.finra.org/
All investment advisors must pass certain federal / state exams to be licensed. Any criminal records will show up here as well.
I feel your concern, my parents had the same situation with a financial advisor who they trusted bc they liked him, not bc he was a money guru. It sounds like 1% is normal, but if I were you I'd check what he has them investing in. My parents had been losing thousands investing exclusively in fixed-rate annuities until the advisor died and I convinced them to move to a Vanguard Retirement Index.
Thanks for the advice. It seems like his rate is standard, but I’ll go along with them just to see how he’s managing their money. As long as nothing is crazy (e.g. he has them 90% in high risk investments 5 years from retirement) I’ll just mention other options to them for them to consider, but leave it up to them.
But this should be balanced in a portfolio with 'safer' assets right? Like some % in the ETF & other percent in assets that won't lose value in a market crash.. right? Im trying to get myself organized to ditch my advisor & this is what I understand so please correct me. Also curious what is the recommended type of assets for safety..? My advisor is trying to sell me some CD's right now & I'm skeptical.
Also, Shouldn't OP be concerned about simply selling everything to buy the ETF & incurring capitol gains taxes that could be better minimized with some more nuanced approach? This is not a rhetorical question, I'm in a similar situation wanting the educate myself to move funds from an advisor to Vaguard & self manage for the sake of minimising fees.
My parents are within 5 and 10 years of retirement respectively. Neither should hold a significant amount of money in an index fund matching something like the S&P500.
Anyways, I’m not looking to manage their money for them or tell them what to do. I was just concerned that they were being taken advantage of, and if so, what I should look for and what I should try and recommend for them.
Being taken advantage of is normal when you’re using a stock broker as your financial planner.
Use Morningstar to scout the fees and see what the loads, fees, and tax impacts are for the funds the broker put them into. My guess is you’ll be disgusted and have them in a robotrader or low cost index fund quickly.
or better, develop an investment policy statement, your true level of risk tolerance, and invest in low cost index funds (as you say) AND STICK TO IT.
1-2 percent is normal for this kind of work. That's why I manage my own finances. You could also look into a fee - only type of financial planner.
That is a normal, average fee for portfolio management. Some may get a much better deal, some may pay more, but 1% is 'normal'. However, note that the usual advice given to retirees is that they can take out and spend about 4% of their initial portfolio value the first year (the classic "4% rule"), then increase that amount by the inflation rate for the next year, and so on. The 1% management fee is 25% of the total amount of money that can semi-safely be spent (and if you only want to spend 3%, it is 33% of the total). I personally believe that is way too much money to give to somebody who does not even guarantee a healthy positive return that beats the market by some specified degree - even if the market goes down and you lose money, you owe the 1%. If you think of it as "I'm going to give 1/4 of my income for the year to my finance guy" -- the picture is a bit clearer. The only alternatives are to manage your investments yourself (which may work or not), buy an annuity (which have their own expenses but do 'guarantee' income, have a huge portfolio so the 3/4 that is left for you to spend is still a massive amount of money, or throw up your arms in disgust and rant impotently on the internet.
It’s normal, but extremely expensive - over the long term, much more than the 1% annually that they see now - it’s really 1% of their total return which, compounded over many years or even decades, can easily amount to hundreds of thousands of dollars. However, you probably don’t have a lot of room to discuss this with your parents unless they are explicitly asking for your advice.
“The Retirement Gamble” if you have amazon Prime I think you might be able to watch it, it was Season 31 episode 12.
There is no ‘argument’ to my post. Simply informing him that the true cost of 1% of AUM is much more than it would appear from a simplistic calculation.
Whether managers can provide value commensurate with this cost is up for each individual investor to decide, but let’s make sure people understand how much they are really paying before they make that decision.
It’s normal for a typical advisor. Not high, nor low. Whether or not the fees are “worth it” is subjective, you’ll get a lot of feedback on whether or not your parents should even have a FA. But the fees are normal.
The fee percentage can vary a bit depending on your net worth - the more you’re worth, the lower the fee. Worked at a wealth management firm specializing in retirement through college, from my experience never saw anyone besides whales have a fee under 1%, if even then. Your parents’ fee sounds very typical, if not a little low.
I appreciate the advice— thank you.
Knowing my parents they’re probably happy to pay just for the peace of mind and not needing to manage it themselves. Initially, thd fee structure felt off to me, but clearly my gut instinct was wrong. I’m just glad they aren’t being taken advantage of, if they want to pay for an investment advisor that’s their choice.
You’re so welcome! I think that’s why the majority of people have FAs, for peace of mind. A lot of people scoff at the idea because people can “do it themselves” so to speak, but I completely understand why you would want an advisor.
Yes, you can do it yourself but A - it can be pretty complicated depending on your portfolio, contrary to what anonymous people bragging on the internet claim, and B - when you’re retiring it’s your life savings you’re dealing with, and if you haven’t dealt much with finance throughout your life beyond paying your bills and saving money it’s daunting to try and take on investing all on your own. I knew a lot of self-made millionaires who weren’t millionaires because of investment prowess, but because of 45 years of hard work, and though they were extremely intelligent at their trades they were understandably intimidated by things like...the tax implications of lump sum pension payouts, for example. They were paying someone who entire career was based on understanding investments and taxes to help them live out the rest of their lives comfortably. If the returns are healthy then a lot of people feel the money is worth it.
There are scam artists and frauds, yes, but there are good advisors, too. I can’t speak for your parents but the fee part definitely doesn’t sound off. I wish them many happy “returns” :)
If your plumbing breaks and your toilet begins spewing all through to the floor below, you can spend some time on YouTube learning how to fix it, run out to some stores to buy parts and maybe tools to fix it then spend the time to get it all fixed and put back together.
On the other hand, you can pay a plumber to do it all for you. He’ll likely charge you more for the parts than you would have bought them for. Maybe this markup is taking advantage (since you’re in a tough spot), but he’s in part recouping some of his fixed costs (tools that you didn’t buy as well as training). He also saved you time and increased the likelihood it’s fixed right the first time.
Is one approach better than the other? Certainly many are capable of making the fix themselves, and they may even have the tools and parts on hand to do so. But some aren’t able. To each his own.
There is certainly enough free literature out there on investing, retirement readiness, estate planning, tax planning, etc. Are you able to and do you have a willingness to dive into it?
This is the correct answer, and don't listen to all these barbers telling you that you need a haircut.
1% per year isn't just 1% of their money - it's something like 25% of their portfolio's expected real earnings, or equivalently, some similar large fraction of their future retirement income.
Would you pay someone 25% of your income for financial advice? Of course not.
Target retirement funds over at Vanguard, for example, charge about 0.15%, and require zero decisions. Or if you know what you're doing, you can find even cheaper options.
Why would your parents pay someone some 6x the going rate for a complete commodity? Are they really so fancy they need bespoke financial advice, or did someone just get lucky and succeed in selling it to them?
Both normal and they are probably being taken advantage of. This is what you accept I suppose if you cannot take the time to review the prime directive here and learn some basic truths about investing and how simple it can be.
It is possible for it to be worth it, but very few advisors will do the work to make that true or choose not to walk the line of legality and conflict to significantly increase their incomes. Have them think about the fees as a $ amount and ask themselves if the service and advice on an hourly basis seems like it is being provided at a fair rate.
Also, at a very minimum, make sure this advisor isn't also investing them into high expense ratio funds and getting sweet commissions from doing so.
Wealthy people pay 1% of their assets under management for investment management, use their CFP not their lawyer for estate planning and their CFP not their accountant for tax planning. OK. What else you selling?
Also OP made no mention of such wealth.
Take a look at any professional financial planning software and you’ll see they do tax forecasting and planning. The financial details for estates are worked up with wealth managers, lawyers draw up the contracts and make them legal. Most custodians allow trusts to be formed for assets. Wealth management with a fiduciary is much bigger than you realize.
Pretty standard fee, some Planners use a tiered system based on assets under management. As many have said here, if your planner isn’t charging a fee that’s when you should get worried since they will get paid somewhere and if it’s not your parents than that means it’s coming from what he selling to your parents. Fee based (like the one your parents have) is generally the best kind of advisor since they are going to match you with products that are best for them.
I guess I was just surprised that he takes a percentage of their total fund for his fee, and not some other structure.
Edit: yes I understand that they need to make money somehow, I’m just surprised that they’re charging tens of thousands of dollars a year to manage their finances. My mental image of a financial advisor had always been someone who a high hourly rate for work/consultation, and helps balance a portfolio based on personal preferences and goals.
Firstly, I am well aware of that, although it doesn’t matter because I’m not trying to manage their money for them. I was simply concerned that their FA was taking advantage of them or even defrauding them, but as I’m (clearly) not familiar with standard practices for financial advisors, I asked here first.
Of course it turns out that his fee is reasonable, and not indicative of fraud or deceit, and they’re clearly entitled to spend their money however they want. If everything is on level, I have no desire to insert myself into their finances.
An advisor wouldn't take a percentage of the growth or profit that he makes. That's because he wouldn't make a dime when the markets aren't doing well. Can't have that happen for long.
I guess I was just surprised that he takes a percentage of their total fund for his fee, and not of the growth or profit that he makes for it.
To be honest, this says more about OP's ignorance of how investment advice works than anything else, particularly choosing to post it on Reddit. He didn't believe his parents when they said it was normal, and is being told the same thing here.
You have to consider that he may also be providing advice on other investment topics that don't necessarily translate to a return. Think of this way, do you want your parents to work with someone who cares about their portfolio and will take the time to offer meaningful advice. Or do you want them to work with someone who will push stocks just to make a commission?
Also, 800 a month isn't that much. I charge more than that monthly to manage simple websites. It sounds like your parents have a good thing going with their financial advisor. I'd advice you not to make it awkward for them.
Because as an advisor it’s more than about growth with your clients. You can’t receive increases returns without increasing risk which is where the balance comes in. Thus if they followed your model they would either. A) increase risk to gain returns to pay the bills or B) cut your parents loss as a client when they need them the most which is before retirement. If your parents are nearing retirement age, they are in the capital preservation mode of investing where they need to make their income last for the next 30 years without principle risk. Everyone can be a genius in a bull market like we had for the last 10 years. Really advisors make their money in times like these where your parents don’t lose their savings right before they retire in a bottom of an economic cycle. I know a lot of people that self management money, to do it effectively it takes a lot of time to learn.
You’re completely correct, I was thinking of things from my own point of view (ie young professional whose primary focus is currently on growth) when I wrote that comment.
More to the point: I was not familiar with how FAs tend to work or bill their clients. When my parents told me he took 1% of their total AUM it didn’t sit right in my gut, which is why I came here for advice. Of course it turns out my gut instincts were wrong, but I’m still glad to have posted because I’ve learned a lot about the FA industry.
The answer is that it depends. There is not enough info here to answer the question. Fees will vary depending on the size of the account & the types of things in it. A good manager charging 1% or even a bot more for assets under management can be very reasonable. A "manager" who double dips by charging you and who also collects sales fees from high load instruments, etc. is a ripoff. On the face of it - someone who used to be a preacher and who does not make their professional certifications clear would raise a ton of red flags for me. I'd at least read up on the industry and compare what your folks are getting (net of all fees) with what a modern "robo-advisor" does. I'd also find out how much CPA + lawyer type estate planning/management time is baked into this. If none, again, flags might go up.
I’ve looked them up and they are a registered investment advisor in our state.
I was mostly surprised that he charged 1% of the total fund. I can’t imagine how he can possibly bring over $10,000 a year in value to them, which is what approximately 1% of my parents retirement account would be, and I would hate to see my parents lose tens of thousands of dollars for services they don’t need.
Edit: Although it does seem that this is a standard fee.
bottom line is to ask the question, is $10,000 a year worth it?
How much per hour are you paying this person? (and are commissions and other charges on top of that?)
Are these investments also costing money, like an additional 1% on top of this person?
What would the difference be if you just put the money in a variety of investments yourself?
the other bottom line, how is the investment doing? If the total return after all costs are considered is fantastic, then maybe it works and is worth it. Did those advisors deal with the crappy December in stocks, for instance.
But if the total return stinks, and you are paying a lot for it (and you have to pay no matter what), then perhaps a change is warranted.
My original concern was that this person was acting unethically or charging exorbitant fees, but that’s clearly not the case, I was just unaware of standard financial practices.
My goal isn’t to change their mind or make do things a particular way. If I think they could save a significant amount of money managing their own finances I would just bring that up and let them know what some good starting resources were in case they were interested, but then I would butt out.
Like you said, and the end of the day it’s their money and if the ease and peace of mind is worth it to them, then that’s their decision. I just want to make a fully informed decision, but beyond that I don’t want to push them into something they don’t want or aren’t comfortable with.
I'd look up the requirements for SEC registration vs requirements for state registration as a Registered Investment Advisor. I'd not put much stock (no pun intended) in just the basic registration. Also look into just being an RIA vs someone with a CPA, CFA, CFP, , etc filling that role. Color me skeptical....
You likely have a bunch of reading ahead of you. It is worth knowing what he is really doing and demanding full transparency regarding how he is making money off the account. It is worth knowing the kinds of advisors available to you and the kinds of fee structures in play.
Yes, it is normal for fees to be based on the total amount of funds under management, not a percentage of growth, unless you are talking about a hedge fund, where they charge based on total value PLUS a performance fee.
Whether or not it's worth $10,000 to them depends on how well their investments perform over the market average, and how much advice they receive. Paying a fee because "he's a nice guy" isn't the wisest investment strategy. Heck, I'll be nice to your parents for $10k a year!
Honestly, this is ok. You have to pay people for their time, otherwise they’re getting paid by brokerages and investment products that fuck you over vs the alternative.
Whether or not his planner is worth 1% a year is a discussion worth having. But the fee is not unreasonable. All assets are going to be taxed with fees like the expense ratio, which applies not to growth but total asset holdings. People that work and provide advice and planning have to be paid somehow. It is far preferable to pay for advice than accept free advice subsidized by someone else.
It’s absolutely normal, but it also depends on what financial vehicles the financial advisor is recommending. Some vehicles have fees build into them.
My parents were the same. I told them I'd never do this (because 1% is a pretty big chunk of change to pay every year). But they felt more comfortable with an "expert" handling things. 10 years later mom is still using that same planner.
I looked over the investments they put them in and they aren't anything horrible, but they do have a quite a bit higher expenses than say index funds.
My father passed away in September (side note: fuck cancer). One of the first things he had on his list of things for us to do at his end of life was contact the financial advisors he had been working with to prepare for, and organize my parents' retirement.
Our FAs are through Wells Fargo, and they have been absolute life-savers in this difficult time. They are full-service, in that, their advice extends to my brother and my 401k and investments as well.
Within a week or so of my father's passing, they had several financial plans ready for my mother to ensure that she can not only survive, but actually thrive, in her retirement, and unfortunate new found life as a widower. They have worked tirelessly to educate my brother and myself on the various brokerage accounts they manage for my parents. As well, they have assisted the lawyer in the probate of the estate and worked to keep our taxes down.
Their fee is 1% per year. I do not feel that my family is being ripped off at all, and I cannot tell you the relief that I have felt having them have our backs.
In addition, they are fiduciary. This, essentially means they have a responsibility to my mother, and have to act in her best interest. They also have to disclose if they make any fee more than their 1%. As an example.. my mother had an annuity that, for years, did not make sense tax-wise to sell, until my father passed. They have since moved that annuity to another company, preserved the death benefit and turned on an income stream for my mother. As a result of that particular sale, they got 4%, and were required to disclose that to her.
Hope that helps a bit, though, this thread is full of a large amount of info already. Happy Holidays!
Their fee is, yes, 1%.
I really appreciate the time you took to type all this out. I’m very sorry for your loss, but I’m glad to hear that your father’s FAs were so helpful during such a difficult period. The purpose of my coming along was so that I could be better informed about their estate in the event of a “worst case” scenario. I hadn’t thought about all of the other possible benefits you mentioned outside of just providing a steady return on their retirement investments; your post was very insightful.
I will make sure to look into whether this FA is fiduciary.
I see that most everyone says this is normal. If your parents don't have over $20 million or so and require estate planning, then you are probably correct. Your parents are not dumb though. The vast majority of adults do not understand personal finance. It depends on the circumstances, but really you want fee based advisers or someone with fiduciary responsibility. That just means that they are legally obligated to act in you best interest. Many FA are actually sales people. To me this sounds like sales people unless your parents are very wealthy.
1% per year, .25% per quarter is totally normal for a full service advisor. In 2017 with their help I netted 20% on roughly $1M. In 2018 it looks like I’ll see gains of roughly 6% (December has been a rough month). I’m involved as I want to be. But my advisor and his company is doing all the leg work.
Specific recommendations on stocks or instruments to meet my specific goals. Tax planning strategies. Very good communications (in person meetings as demanded or at least once a quarter at locations of my choosing. Easy to use web based and mobile options to see exactly what’s happening at any given time. Fast access to funds if desired.). All the paper and tax records snail mailed to me and CPA, bound, punched and organized in chronological order. I’d say the communications are the number 1 or 2 thing for me along with reasonable growth. It’s super important to know that when I call he answers or calls me back within the hour. He also ensures that I have access to a live assistant or partner when he’s going to be unavailable.
Do you think he's worth the $10K/year you're paying him? That seems like a lot.
I mean is it a giant fund with a bunch of trusts and moving pieces? Or just a guy at the local edward jones office.
This is how you as the client wants him to charge.
There are two ways of paying fees:
fixed percentage of assets under management (.5-1.25% depending on asset level commissions that are paid on a trade or move into a new strategy
The fee-based approach incentivizes the advisor to grow the assets of the client in order to improve his compensation. (1% of $1.25MM is 25% larger than 1% of $1MM. A 25% raise doesn't suck.)
The commission-based approach incentivizes the advisor to alter the client's strategy frequently in order to increase their own compensation regardless of performance. Look up how much advisors get paid on A-shares mutual funds and annuities. It's a very substantial amount.
Finally - make sure your advisor is taking care of the whole picture. So many guys simply manage the assets and don't get into: estate planning & trust, asset structuring, tax-loss harvesting, etc. Those are such simple services for all major firms, however a lot of advisors aren't taking advantage of those services because they don't profit from it.
I don't hear anything from your initial post that would stand out. But of course there may be more to the story
I appreciate the in depth reply and information.
From doing my own internet research on this person and talking a bit more with my parents nothing seems to be out of the ordinary, and he seems to be very transparent about where their money is.
I am still going to sit in with them when they might their advisor, but more just to learn about their estate and how they’re managing things. It’s still a good learning opportunity for me.
1% is relatively low IMHO. Depending on the amount of assets that the financial professional takes care for your parents/ estate, the fee will vary (usually decreases). The professional would help with handling with estate, retirement and also taxes (bare minimum); depending on what your parents/ estate/ business assets are in will also have another dimension of complexity added for the professional as well.
If fees are a problem, go with a roboadvisor— although, these services aren’t complex or detailed as with a wealth advisor/ licensed financial professional.
There are flat-rate CFPs that do not charge based on AUM. They are gaining in popularity as more and more people move away from these types of setups.
For me the value proposition requires that the portfolio consistently beats a standard 60/40 or 70/30 portfolio (or whatever most closely represents your goals) that tracks the market; net of the 1% fee.
If they are generating returns greater than what you could get by just handing your money over to vanguard/fidelity/schwab, then the service is likely worth it. If they are not, then I'd maybe start shopping around.
Although, as someone else mentioned, you need to account for the other services and intangibles they provide such as tax coordination, understanding your goals, etc.
The most important thing is to understand what you are paying for.
So 1% is an even bigger chunk of their returns, with an age in bonds approach they may only expect 4% returns. That means they are handing over 1/4 of their returns. % of AUM doesn’t make sense to me. Managing a portfolio of 1M vs 10M does not warrant a 10x increase in fees.
Many advisors will earn their 1% this week by talking their clients out of selling everything during this downturn.
It's really unfortunate, I know some very financially literate people that all steered me toward the investor at their bank chain, or a financial planner at BigExpensiveFunds and some rando who claims to be a fiduciary but seems like a crook. All of them seemed to be financially literate but it may have been a few years since they've been plugged into the field and things have changed. This is the case with a lot of our parents. And unfortunately, many parents feel like they've been doing this a long time and they know more than they're kids about this stuff.
These percent charges always boggles my mind. Say one person has 500k, and another has 1,000k. Does that second actually receive the value of TWICE the first person? Is there really another $5000 of service provided?
To me, it seems like there there is exactly zero more dollars of value based on the services provided.
Yeah, I've had this thought too. Especially since there are many years where advisors can just coast without even paying too much attention to an account.
Wow I was surprised at how uninformed a lot of r/personalfinance was on this thread. Do people really think that sticking all their assets in a few index funds is what an RIA does? Is this sub mostly little kids? I think that’s fine if you’re in your 20’s, but your financial issues are more complex as you have kids, planning for retirement, looking at tax issues with estate planning, budgeting, and whatnot? That’s a lot of work that takes a lot more than an hour on a spreadsheet. Not to mention a lot of people are saying the 1% is compounding? If they’re losing money, the fee is getting a lot smaller and smaller, which is the case post retirement. To be fair, I’m only in my mid-20’s so I don’t use an RIA (yet), but managing two of my investment properties so far has been taking two to three hours a week so far (and I hired a property management firm to handle most of the day-to-day operations of it) on top of my current job. If I was a lot older and wanted to be less hands on with my finances and spend more time with my kids, etc. 1.00% is nothing. The target retirement funds people rave about are charging 0.10-0.20%, so the extra 0.80%-0.90% is personalizing it to your situation
Thanks for the insight. The point is that I didn’t really know, which is why I was asking here.
It seems like his fee is on level. I’ll still go along with them because being informed about family finances is good practice in case something catastrophic happens, but unless he’s completely mismanaging their money or doing something clearly insane I’ll leave their financial decisions to themselves. Again, thanks for the advice.
Yeah. Using an RIA is definitely on a case-by-case basis. You don’t need one if you’re living paycheck to paycheck or if you’re still early in your career-good saving habits are more important. But id say it’ll start making more sense when your cash-bonds-stocks(i.e. not just the value of their house) gets to around $2-500,000+ and you have a lot of big expenditures and retirement looming in the corner. My good friend is an RIA, so we talk about his work quite a bit. Best of luck!
The charge is typically based on total assets under management.
Vanguard charges 0.3% per year, Fidelity at 0.35%. Charles Schwab is 0%, and Betterment ranges from 0.15% to 0.4%.
So I would say that 1% is rather high.
These fees are more representative of “robo advisors”. Traditional Financial Planners that meet with the client and provide other wealth services are 1 - 1.5
Robo advisors still charge a fee, but offer nothing compared to good fiduciaries, who work with their clients doing full financial planning, estate planning, social security and fixed income strategies, and tax planning for high worth clients.
They offer a tiny fraction of the overall services offered, particularly for wealthy people that have different needs.
Absolutely normal, competitive, and could be a great fee rate depending on your AUM value to the firm, especially if they're a fee only practice. If more than $1MM, you could try and negotiate lower, but you have to think about the amount of work the firm is doing and why it's worth their time to manage your family's account. Especially if they're good and providing value. It's hard to say without seeing the actual portfolio. I've seen some that charge half that and are just crap and some charging double that are REALLY good with more private equity or agricultural positions which require significant due diligence and much more time to deal with properly. Most higher end firms have minimums of at least $250k and some even $5mm or $10mm.
So 1,000 dollars a year for every 100,000 they manage? I'd say that's fair...
The question I have is can a financial advisor, over a long period of time, reliably beat the market by more than their fee? I seem to recall reading a study that said no, but I’ll have to go digging for it again to make sure of what it really said.
Either way, I’ll go along with them to see what’s up. If he’s not doing anything shady I’ll just let them know that there are other options, but let them decide what they want to do. It is their money and their decision after all.
Any adviser who can't beat 1% is worse than just throwing your money in a high interest savings account.....
It’s not that they can’t beat 1%, it’s that they can’t reliably beat the market by a margin of 1%.
Of course not every person should be targeting growth (for example, my parents who are close to retirement), and they offer other services and can provide value in other ways, such as peace of mind, but for most “regular” and financially literate people I think FAs are not a good use of money, at least earlier in life when your finances are still fairly simple.
However the value of a FA is not my concern with my parents. They’re free to spend their money how they see fit, I just wanted to make sure they weren’t being outright scammed.
That's fair, and awesome of you to help out your folks. It definitely wouldn't hurt to see what kind of returns they're getting on that 1% fee.
I imagine a good advisor would tell you flat out that they aren't trying to" beat the market'. That's not how you invest or manage money you actually need.
It's both standard and they are being taken advantage of.
I would never recommend anyone pay 1% of their money every year for someone to pick a few funds for them. But it is the standard fee for "financial advisors". I just think that's almost never of value to most people.
Thank you for the advice.
I was primarily concerned that they were being seriously taken advantage of or defrauded. This may be a bad value, but for them it may also be worth it. They’re nearing retirement, have two children, a home, and a fair amount of money saved. Managing everything could be overwhelming. I’ll speak with them about other options that may provide a better value, but I’ll let them make their own, informed decisions over their money without me pressuring them into one thing or the other.
I'd happily "manage" the things you listed for .5% of their money annually. :)
It really doesn't take much time at all and paying 1% a year is pretty sad. But, of course, they have to make their own decisions about that.
I see you are cherry picking advice and reading what you want to. Their advisor is doing more than picking a few funds for your parents. If they invited you in and are explaining estate strategies to you and explained what they charge, then they probably have a good one.
Don’t ruin this for them.
I don’t think my comment came across the way I meant it to, I do generally agree with you.
My original concern was that they were being outright scammed—clearly this isn’t the case, I was just unsure of standard industry fees (hence my asking here).
As long as they aren’t being scammed or having their money horribly mismanaged, I don’t see it as my place to butt in and tell them how to handle their affairs. I plan to go along to meet their advisor so as to better understand their estate and how it is being managed and exactly what services the FA provides, not to charge in and confront a professional FA with my Reddit advice.
If I truly think there might be better options for my parents out there, the most I would do is mention them as options and encourage them to do their own research. I have no desire to manage their money or make their decisions for them.
Normal. It's a percentage so that the fee is success driven. The better they manage your money the more they make.
1% is a pretty standard fee for “all in” management.
That being said - there is some nuance. For example the firm I currently use, while I get my financial feet under me charges 1% of $400,000 as a minimum charge until you get past that bracket. Then it’s 1% of the balance from there up to $1Mil.
After 1 million the % starts dropping on a sliding scale. So for example maybe at 2m the fee is .9%
That all being said - just because it’s standard practice doesn’t mean you can’t shop a better deal
My comment takes into consideration your edit. What the financial planner is doing is not unlawful, but it is nevertheless predatory. He, like most others of that ilk, makes an absolute killing from establishing trusting relationships with the most vulnerable - people in the last years of their working lives, at a time when the need for reliable support increases, and when the need to establish secure retirement funding becomes most important. He is effectively reducing their quality of life in retirement by reducing their available retirement funds. And he calls himself a financial planner. The only retirement he is taking into consideration is his own. Its despicable.
Just a question, what do you do for a living? Would people think that the time you spend selling them whatever good or service you provide is a total ripoff?
1% of 1 million managed is how much? Would you really consider that a fair charge for buying a low risk fund and talking it up as safe to some old people? right.
While a 1% fee may be industry standard, he’s raking in tens of thousands of dollars a year for managing their money, and it makes me wonder how many hours is he actually spending on balancing their investments. I’m sure there’s more to it than just dropping their money into Vanguard index funds and calling it a day, but it’s difficult for me to imagine that he’s providing tens of thousands of dollars of value above what a reasonably educated and savvy investor could do on their own.
Of course if they’re comfortable with paying this fee in order to not have to worry about their money, that’s their prerogative. I just want them to make an informed decision regarding possible alternatives.
Some of the wealthiest people pay at least 1% (many negotiate lower, but it takes a lot of $ to influence someone to reduce below 1%)
Many things can be incorporated in this - some provide more actual advice than others, some are just actively managing portfolios and if you compare their investment performance to the market/index, hopefully you see them OUTPERFORMING the market/whatever benchmark they target by AT LEAST 1% (but usually the numbers are reported "net of fees" anyway, so it's easy to compare apples to apples.. but you still want to think you are getting SOME additional benefit over and above the benchmark/index... which should hopefully include advice, not just investment management)
Advice can include a meeting once a year (or less often) going over your situation, making referrals to financial planners, tax lawyers, accountants, etc....
A lot of people NEED to pay that 1% to stop themselves from making stupid decisions, from having the 'mental comfort' that they can call someone "hey what's this bitcoin thing" and get a legitimate answer with actual advice (like stay the fuck away from it, and if you have to, put play money into it that you are comfortable losing like at the casino), etc.
This is not a scam. This is standard practice. In the same way a mechanic charges money for their services, this person is charging for their time and expertise. You can read how to fix a car, but not everyone wants to.
A charge on assets under management is how people in the financial industry get paid. If he was completely upfront with this I’m less concerned, but by all means do some research if he is charging other fees on loaded mutual funds.
This person is hopefully helping them understand what’s happening with their money. Keeping them from selling when the market tanks. Regularly meeting with them and helping them plan for their retirement and other saving goals.
You will get a whole bunch of people telling them to do it themselves. That depends. How complicated is their situation. Are they artists or financial professionals? Are they emotional actors or analytical people who would enjoy doing it (the fact that they didn’t know the fee...) Are they running a 60/40 portfolio? Are they tax loss harvesting? Are they having to decide where it’s tax most efficient to take out money? Would they understand the last three sentences and why its important?
If they are just getting a statement every quarter. Yes. Change advisors or do it themselves. If they are getting someone who helps them through their complicated finances, stay put.
Source: used to hate financial advisors (still don’t believe most of them are that great) until meeting tons of smart educated people who actively hurt themselves financially (eg: allocate large portions of their portfolio to bitcoin or gold, sell after market drops, and 1/n diversify their retirement accounts).
Well.
If they make 10% of their total wealth on top of that, that's just about the same as making 9%. Most funds annualized year over year make somewhere in the ballpark of 4-8%.
If this fund is making 8-15% yoy, wouldn't you say that's worth it?
To answer the question in a less round-a-bout way. Yes. It's normal. But look at their track-record. Better quality management costs more money. Are they over-preforming relative to other firms that cost less?
Is this thru a bank like Chase (like Chase Private Client)? If so, yeah, this is about what they charge.
Its a better deal that charging for each transaction as it aligns their goals of risk and growth.
Otherwise you tend to get “churn” transactions which brokers love and many clients accept as they don’t understand but if it came from the broker then it’s a good idea.
Last thing you want is your parents to be scammed. If your parents don’t mind, have them share with you where he wants to put their investments so that you can do some investigation to see if it’s legitimate. There’s a (former) financial advisor I know of that is going to be up on federal charges for scamming many people that were invested into a lifetime annuity. All of these people were older couples. Once their money is invested, maybe see if you can get proof that it was properly invested into whatever means of investment he’s advising.
They meet with him quarterly, I’ll be going along to one of these meetings in order to have a better understanding of their estate. I’m going in with an open mind. He seems to be fairly transparent and while some people here definitely think a FA is not worth the cost, that’s not what I’m worried about. If he’s a legitimate FA and doing an appropriate job, it’s not my place to tell my parents how they should handle their funds.
A flat 1% management fee is completely normal and reasonable.
I am a financial adviser and some clients can pay up to 40-50k a year. 1% is very common.
I would say no under the “What’s good for the goose is good for the gander” clause.
Basically he makes more if they make more. But... they made more.
Fees for a 3/38 on most 401k are under 50 basis points which is half a percent.
But I thought Warren Buffet proved that just blindly buying mutual funds which essentially are the whole market is better than hiring an advisor to pick and choose what stocks they think the winners will be?...
Like everyone has said, that is completely normal - maybe even great depending on the amount of assets that are being managed. It’s almost across the board the more that’s being managed, the lower the advisors fee and program fee (ex: .80 advisor fee + .10 program fee = .90% annual rate.) If you feel that’s too much for a full service broker/dealer then convince them to take their shit to E*TRADE or something.
It’s normal. They’re being boned. Get them to switch to someone with a fiduciary duty
I’m going to look into the fiduciary duty with this particular person, however I think there can be value to FA as well. They provide more than just returns, especially for more complex portfolios as one begins to approach retirement age. If my parents want to use this FA I don’t think it’s my place to step in unless he’s scamming or defrauding them, which doesn’t seem to be the case here.
I concur! I just find the 1% distasteful personally. I almost went into FA before I realized that they are literally salespeople. That is 97% of the job—it’s called Assets Under Management, and your income is directly linked to it. There is zero incentive to help mom and pops, and LOTS of incentive to mostly pay attention/care most about the biggest fish (clients) and getting more of them. That coupled with the fact that no human can beat index funds year in and year out, and I just can’t respect the predators that take 1% because people are financially illiterate.
Someone with a fiduciary is DUTY AND LAW-BOUND to give the best advice and guidance possible. Anything else, or less, is just too slippery of a slope, ethics and temptation wise. If you got paid 1% of AUM, who’s gonna get more attention/better advice? The guy worth 10mil or the guy worth 340k? Only human nature
If your parents already have 10mil they’re probably getting excellent care and attention and don’t need your advice. If they’re normal people, see if their FA passes the acid test: has he been beating market averages for your parents, or not?
Flat fee/fiduciary duty is blindingly better for normal people unless they live next door to Peter Thiel
I was gonna say, others probably have already mentioned, but 2% is a common advisory fee for most brokers. Your parents are actually getting charged 50% less than what other firms currently charge for advice.
Is actually on the lower end tbh, I think most services can be like 1-3%. Traditionally they are better to be involved with, because they only make money when you make money, so they will go into sound investments that generate positive and steady growth returns. The fee guys are less likely to care because they getting money from you every month (usually) whether you go up or down and have nothing invested in success.
There was an article in Denmark, which said that for every 1%(pr year) you save on your retirement fund you can retire 5-7 year earlier. In conclusion you can save a f*ck ton of money, if you do alittle your self. Maybe just Change fra active to passive invest funds.
I am a little over that. I think 1.25% but I have the final say on everything and he doesn't make any buys or sells unless it goes through me. I like to be very involved and know what is going on with my money and why. After watching my dad lose over a third of his retirement in one year it changed how I view things. He had his setup so he got statements every quarter, but by the time things were caught it was too late. They guy never even called him and told him about the lost money. I highly recommend meeting with your financial person every 6 months. Sure you can check statements online, but that still doesn't give you the whole picture. I was lucky to find someone local who is intelligent and very knowledgeable. I made 20% last year which I think is pretty good. My dad in the last 5 years has had at least 20% each year, last year was 30%. He was finally able to retire last year.
Charging 1% of AUM is “industry standard,” but just because it is normal doesn’t mean it’s not a ripoff.
Financial advisors will argue that they provide a lot of value for that 1%, such as tax and estate planning.
This does add value, but tax and estate planning can be handled on an hourly basis by a competent attorney (an attorney would need to prepare the tax/estate documents anyway) and I can assure you that the total fees paid to the attorney for the estate/tax planning would be far lower than 1% of AUM.
Low-cost index investing + hourly advice from competent professionals Vs. Pay financial advisor 1% AUM, and leave the details to the financial advisor that you trust.
Your parents should consider which is a smart use of money considering that the financial advisor is receiving hundreds of thousands of dollars over the life of the portfolio.
Is 1% of AUM the ONLY fee charged? Its all relative to expectations. Is he just helping them avoid pitfalls, preparing financial statements and recommending funds? Are those funds he is recommending proprietary? Is he making additional fees off his recommendations? Paying attention to what is in his portfolio is more important than the 1% fee which could be the least of your worries.
It comes down to expectations. We charge 2% of AUM and 20% of profit (on the investment side) but what is expected of us is vastly different so clients gladly pay the cost.
1% has been the standard for a hundred years or something.
It's becoming fashionable these days to cut out the hand holder and do everything yourself to keep that 1%/y and that's a perfectly fine option for people who don't want/need hand holding.
In the last few decades, it has gotten easier and easier to manage all these things oneself, so there is less need to pay investment managers to assist with it.
There are plenty of other arrangements that can be made as well.
Many people suggest these days to use "by the hour" planners which may or may not have multi-hour minimums. Those could easily run a few hundred dollars for the initial setup and there could be "reviews" that occur every so often which charge the same fee again.
Between those two options, the rich people would probably prefer by the hour advice and poor people probably should prefer % of assets advice.
If someone paid $500 for "by the hour" service in a year, then that's equivalent to 1% of assets on 50k. Many people who want this type of service have far lower than 50k of assets.
It really matters what situation one is in, however, if they should be paying these fees and if yes then how to lower the fees.
It should also be noted that the amount the adviser cares about the client probably varies proportionally to the fees they are looking to collect, so minimizing adviser fees may also minimize the quality of advice given.
That seems like a lot, it does seem standard.
Honestly these services are rarely worth while unless you got way more then the average person.
AUM fees are bullshit. Recommend them to someone who just charges a flat fee.
Well I just shopped 2 other individuals/companies and one was at 1.75% per year and the other agreed to 1% per year with a $6k fee for an “investment plan”. I laughed at that guy.
You'r concern is exactly on target, the financial advisory industry has sold all of us a flawed business model. Example: $1m under mgmt, 1% fee= $10,000. Say 5% return on assets = $50,000. Thus, REAL cost of the tranaction is 20%, not 1%! Now that's simply a stupid business deal. After having several FA's manage our money I fired them and do it my self. Most, not all, of the FA's I've met care more about relationships rather than worrying about your money. And their business model is structured to produce that outcome. You take 99% of the downside based on their risk free advice. Don't be baffled by conventional propaganda, your instincts are correct!
I think any financial planner is a rip off, but that's just me. The industry is riff with misaligned interests and snake oil. People who work in financial planning generally are the same people who aren't necessarily doing that great financially.
Question you should be asking is if they're so good with your money, are they putting their own money into the same investments they're putting your parents money into? If they say no, immediate red flag.
If you ask the average person how much they understand retirement planning, the large majority of people have no idea what they're doing. It makes sense then to hire someone to take care of all that stuff for you. Also, how do you know that people who work in financial services aren't doing well financially? Average salary for financial advisors is around $90k/year which is one of the higher paying professions. Your second point is invalid since optimal investment options are different for different people. You wouldn't tell your parents who are a year from retiring to put 100% of their money in an S&P500 index fund because it's too much risk given their situation. Also, the amount of money available for investing will determine portfolio balance since it affects an investor's risk tolerance.
Financial advisors do a lot more than just give investment advice. It includes tax planning, where and when to use tax-deferred accounts, insurance products, securities, and other forms of savings accounts to grow wealth. Doesn't matter how much money you make, the information is useful regardless. If you're going to hedge fund managers, then that's a completely different field than an average financial advisor. And even if you don't make a lot of money, you need to understand investing basics otherwise you lose money over time due to inflation.
For example, if you have moderate risk tolerance but put most of your assets in US Treasuries because you read they were low risk, you're going to have a massively sub-optimal portfolio compared to one that's more catered to your risk tolerance. That's the whole idea behind the efficient frontier and I would argue that 95% of individual investors do not understand that concept. Some of the people in this subreddit probably can't justify a 1% charge but it's generally not a bad idea unless the advisor is picking individual stocks instead of rebalancing asset classes.
Please read my first comment. Again, you would not tell people who are 1 year from retirement to put all their assets in a Vanguard S&P 500 Index fund because it's too risky given their situation. Perfect example is the last 2 months. If a couple was going to retire in January, they just lost a massive chunk of their retirement funds due to normal fluctuations in the stock market.
Could be a different investment when your young and don't have many bills or kids then maybe you do some risky investments where as when managing another person's money who expects it to always be there and grow they'll do low risk investments
It is normal practice to do this, it does not indicate anything sketchy going on, but it’s unlikely that it’s worth the 1% fees. 1% is a lot when you only get 5-7% return on your investment per year! That’s 20-14% of their return per year. If you are comfortable you can learn about investing on your own and put them in something that will do just as well as the financial planner most likely
Fortunately there are a lot of options that people can choose on their own other than CDs and low interest savings accounts.
How much better do you do than someone investing their money in some of the standard index funds with a basic level of diversity? I have yet to meet a financial advisor who can consistently beat the market by more than their fee, which definitely makes paying it seem ridiculous for anyone who is well informed.
It seems that 1% is fairly standard, and I don’t think they’re being scammed or defrauded (which was my original concern), but I think that it’s easy to make the argument that FA’s do not provide a good value, at least for people with fairly simple financial situations who are still in a growth focused part of their retirement planning.
And how many index funds also manage their taxes and estate planning as well as insurance needs and must be up to date on tax implications for a myriad of different things? The list goes on. Financial planners don't just do it investments. It's one part of a multi faceted job. But if you want to use index funds only to lose everything to the state when you wind up in a nursing home so your beneficiaries are left with nothing it's your choice as a free American and I respect that choice. If it was all a scam the profession wouldn't exist. Not to say that there aren't scammers who discredit the name but if it was everyone then the free market would eliminate it. If it didn't serve a benefit it wouldn't exist. While the government may bail out and subsidize banks and lenders it doesn't subsidize the planners.
It's not you making them 7-10%, it's their money helping out productive enterprises that's doing that.
Also, savings doesn't earn 0.5%, and long term CDs are well above 2%...
Unless we hit a big bear market and they make nothing that year. Then it cost 1% to loose money. If its risk diversified it should not happen I know...
· 4 yr. ago
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If they have $1 mil in retirement, 1% every year would be $10,000. An expected growth of a retirement account should be about 4-6%, so $40,000-60,000, for net profit of 30-50,000 annually. It doesn’t seem to extreme. 1% of growth would be $400-600 annually.
Hedge funds are 2 and 20 percent of profits.
This is cheap if they’re a fiduciary.
If you don’t know what the planner’s credentials or experience are then how can you possibly conclude that 1% is too much to pay and assume your parents are getting ripped off? 1% is completely reasonable.
It's extremely expensive to pay 1% fee for asset under management "advice". You can pay only 0.3% at Vanguard personal advisor service... and pay 0.05% expense ratio average for an index fund there.
If I were you, I'd try to convince my parents to switch to Vanguard. 1% advisor AUM fee (rip off fee) over the life time will be about 30%+ cut of the total money your parents will have in retirement. It's predatory to charge that much. I'd not doubt this advisor put the money into a high fee expense ratio 0.5-2% mutual funds also. Run the fuck away.
I appreciate the advice. It seems from other comments in this thread that this is actually a pretty standard fee. A rip off? Perhaps. But not explicitly fraud or predatory. I will make sure to discuss other options with them, but unless I find out that this person is completely mismanaging their money I will let them make their own decisions without interference.
Some brokers like Schwab have networks of financial advisors with IT and other support systems designed specifically to help them to manage their clients well, to include transaction and performance reporting for the FA and the client. Your normal ability to log in to the customer systems does not change, so you can easily monitor and do your own analysis. The FA support system also does not allow the advisors to withdraw funds, a critical protection. They might not invest well but they can’t steal your funds, can only invest what the broker sells, and they don’t get spiffs for pushing bad investments. (It happens. Think Bernie Madoff). They also monitor the performance of the FA overall performance, though I’m not sure how they use the results.
Whether it is a rip-off depends of what the customer would have done without the FA. Most of the respondents here see it as a rip-off because they don’t need it and they know doing well without an FA is a not a high bar to clear. Nevertheless, there are many who, for whatever stupid reason, simply don’t clear that bar and can benefit.
You WANT your financial advisor to have a stake percentage in your funds, that’s motivation to give good financial advice.
Lol that's really misleading. Say a retirement account is 1m, now he's getting 10k each year and probably doing very little. Probably like 5 hours per year.
Walk me through me. I'm curious. And I ask because I've actually been in a position where I had an account in that amount and couldn't really figure out why he should be getting 10k for relatively little time. Additionally I think advisors may be picking up kickbacks on the "load," depending on the fund they put you in.
I mean, I’m not saying always a 1% rate or a high percentage. I’m sure in this situation, they are not making 10K per year. But, I think it’s okay for the advisor to make a small cut in some scenarios.
I mean, in this thread he says that the account is valued over $1m so yeah it is 10k :)
Everything they do can be tracked by monitoring the activity of the account.
Paying 1% to have somebody watching the markets for you, protecting your money, researching companies, and giving you a sense of comfort not having to track performance is completely worth it.
It's not idea but it's also not uncommon. 1% isn't even the upper range of what some financial planners charge, so you can feel good about that.
Consider asking for a discount, and also consider pulling some of the funds (e.g. the cash portions) out of his account and into an Ally account or whatever
Lol at 1% of growth...1% of 10% growth, which if done consistently would be excellent for an FA, on a million dollar portfolio is $1000. Paying your FP like the neighborhood kid who mows your lawn
Still this sounds predatory, why does it have to be in percentage?
Honestly. 1% seems entirely reasonable to me.
There’s a reason it’s difficult to decide how to manage your money. If we all knew how we’d all be doing well.
Not an expert, but I think a 1% fee sounds perfectly reasonable compared to the overall benefits. In fact, can you get me the guy’s number.
Edit: I see people saying “no way” and calling the guy out. If this guy could improve my take home and reduce my tax deductions, I would consider 1% to be a fair price. He will undoubtedly be making and saving me far more.
Should say I think it should be based on earnings. I wouldn’t pay someone 1% on a loss every year
Doesn't sound super unreasonable but if he used to be a preacher he is probably selling some snake oil.
I did some googling on him and things seem to be on level. He’s the president of a not insignificant firm, he studied relevant areas in college, and is a registered investment advisor with the state.
I was sketched out by the fee, but it appears my gut instinct was wrong.
1% is completely normal. Some variable annuities and other funds often charge more than 1%.
Keep in mind that 1% often covers services, the trade fee, programs used and account fees.
Often times you can call and talk to your advisor at anytime (If they’re good).
Maybe you can find an adviser that works for an hourly fee. 1% of a modest retirement, let's say 300k, is 3k a year. That still comes to at least $60/hr for the amount of time the adviser has to spend on their case, and that only goes up if your parents have more money.
I think 1% is pretty fair, though, because an adviser, unlike a stockbroker, can easily earn his keep. Develop a good tax strategy? That could be a good 15% right there. A good structure on the inheritance? That could be another 15% or 30% in taxes.
Usually financial management is 1-1.5% of total per year. As they will also usually bring you a growth of around 6-9% per year.
The only places where you can get it lower is when you use ETF's
1% is NOT expensive. As an advisor there is nothing worse than a kid coming into an estate meeting with parents that have been clients for a decade plus and trying to overturn the cart.
Full service advisors are rare these days and depending on the size they've meet your parents once to three times a year plus maybe some events and correspond with them frequently via mail or email depending on their age. These types of advisors are the best you can get in that they actually care about your parents well being. Everyone in the world gets paid for their services, 1% is fuckin nothing. I charge 1.00% as a minimum and charge all the way up to 1.5%.
There are a lot of people in the industry who sometimes don't care about the client because they're in it for one time 5-8% commissions every seven years, but full service advisors don't get those and care about they're clients.
Right 20k from 2m is nothing though and if you've landed that account you're probably worth more than 200 an hour. An estate plan done by a lawyer or cfp for a 2m complicated couple for example will usually cost at least double that
Also that 200 an hour is so misleading it's clear you don't speak from inside the industry. By time you run that through expenses you're only keeping 40-70% of that per industry standards depending on business model and firm size (Schwab/td stats 2018) which are actually a new high for the advisors this year.
Also that ignores that every hour with an existing clients is an hour not signing a new one. So you have to factor in expected growth loss as well.
1% for a full service advisor is one of the best steals in the industry if you have a good advisor. That percent has remained the same over the last thirty years while most other money management payment types have risen with inflation.
I can't imagine paying 1% unless they are getting 12%+ return every year.
Or the advisor beats market and they still get 1% but his parents keep the additional earnings. Goes both ways.
Depends on what he does to know if it's a rip off or not. If it's just stock market investing, then that's a really high price to pay for something anyone with arithmetic and browsing knowledge can do in an hour or so every quarter as times have changed or if not that, it can be done by just using a flat fee based planner who doesn't charge based on AUM
It sounds to me like their planner has a vested interest in seeing that they continue to do well in all financial aspects. It doesn't sound outrageous at all when I consider that financial planning can really be a full time job. There's a lot of research and learning that has to happen on an ongoing basis to make sure that the performance is the best it can be.
If you are really concerned, take a look at the overall performance of everything this guy is managing. If your parents are happy with the performance and the services, then it's worth whatever they are comfortable paying.
Do your parents need advice? If so, 1% is probably better in the long run than all bonds or money market. It may also be a good deal if they offer tangential advice, such as understanding tax laws.
Now, for 1% I would expect to not be charged any commissions on trades or loads on mutual funds.
We would be able to know more if we saw what the investments are in.
Ask the investment manager if he/she is a “fiduciary.” This means they are acting in your best interest and isn’t earning extra fees (kickbacks) from investments.
There are less expensive ways to manage your money. As long as you have $50,000 invested, which I know is a lot of money for many, Vanguard will assign you a personal advisor for $50 per year to give you advice how to invest for retirement,for school, for purchasing a home, for outside of retirement etc.
Vanguard charges me about .25 percent for my mutual funds investments. I thought their advice was very thorough with attention to low annual charges and tax implications.
You want to make sure for any investment has low charges (meaning 1% or below), and for money outside retirement no excessive buying or selling by the manager, which would have negative tax implications.
I appreciate the response.
I’ll ask about this during the meeting. The person is a registered “investment advisor associate” which, from my cursory google searches, mean he’s not able to take kickbacks or make money off transactions, at least in our state.
I’ll bring up the Vanguard option to them, but as long as this person isn’t completely mismanaging their money I’m not going to pressure them into anything they don’t want to.
The chances are that he is doing an adequate job. However, it is the fees that really can cost an investor.
The law that an advisor must be a fiduciary was passed during the Obama administration. However the Trump administration got rid of this requirement once in office. ( I’m not being political, this is what happened.)
Fortunately, most advisors still act as fiduciaries even though the law was changed.
Edit: good luck. The advisor should welcome the questions.
As long as he’s doing an adequate job I don’t see it as my place to interfere with my parent’s decisions. As other people have brought up, they can also provide a lot of other benefits that aren’t strictly financial such as peace of mind.
I’ll look into his acting as a fiduciary though, thanks for the info regarding that.
Sounds like a good deal. A Commission ensures they want your parents money to grow.
1% over 20 years is soo much money you could randomly pick stocks and funds to outperform his actions.
Wasn't there some data proving dead people that bought stocks 30 years ago outpaced brokers and managers by a few percentage points?
I work in accounting. I routinely see fees of 4-6%. 1% is a bargain.
That may be normal, but that doesn’t mean it’s not an enormous rip off.
Look at reasonable benchmarks to compare the funds invested by your parents financial planner. They should be beating the benchmark by their fee. If not, buy index funds and set it and forget it.
Set it & forget it is God awful advice for a couple approaching retirement. I hear it so often on this sub, but it's so wrong to say as a blanket statement.
Yeah that’s fair, as a blanket statement. But if folks aren’t confident enough to manage their own portfolio, having them intervene is just as dangerous. But your point is valid.